<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT #1
TO
FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the fiscal year ended: June 30, 1996
OR
Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the transition period from ______ to
______.
Commission File Number 0-25012
CENSTOR CORP.
(Exact name of registrant as specified in its charter)
California 94-2775712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2105 Hamilton Ave. # 270, San Jose, CA 95125
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408)298-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Series B Convertible Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of September 15, 1996 was $20,845,182. This valuation is based
on the fair market value of the Registrant's stock as determined by the
Registrant's Board of Directors at the time of issuance of such stock and may
not reflect current fair market value.
At September 15, 1996 registrant had outstanding 9,303,344 shares of
Common Stock.
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PART I
ITEM 1. BUSINESS
The following discussions contain forward-looking statements regarding
future events or the future financial performance of Censtor Corporation, (the
"Company" or "Censtor") that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the documents the Company files from time to time with the Securities
and Exchange Commission.
GENERAL
Censtor was incorporated in 1981, and until early calendar 1996, had
been focused on developing technology for and manufacturing high performance
contact recording heads and media for the computer disk drive industry. The
Company has been unable to raise the capital required to pursue its former
strategy of manufacturing contact recording heads and, accordingly, on July 18,
1996, the Company completed a transaction with Read-Rite Corporation
("Read-Rite") to concentrate its efforts on licensing rather than licensing and
manufacturing. The transaction with Read-Rite (the "Read-Rite Transaction")
involved the purchase by Read-Rite of Censtor's manufacturing and research and
development operations including the tangible assets, contracts and lease
liabilities related thereto together with a grant by Censtor to Read-Rite of a
non-exclusive license to Censtor's patents and other intellectual property
rights related to the Company's technology.
The Company owns or has applied for fundamental patents pertaining to
micro-miniature, low-cost read/write heads and special surface treatments for
disk media that allow continuous head/disk contact during operation ("contact
recording") without excessive wear. Most heads available commercially are
designed to operate at a microscopic distance or "fly" above the surface of the
disk on a cushion of air and come into true contact with the disk only when the
drive is turned off or "powered down." Historically, increases in areal density
(the number of bits of data stored in a unit of area, usually quoted in square
inches, on the surface of the recording disk) have come primarily from
reductions in flying height. Contact recording has not been possible because of
the excessive wear and crash problems inherent in operating conventional head
designs in continuous contact with the disk media. The Company believes that
Censtor technology solves these problems.
The Company's present business model calls for the Company to license
contact recording technology to disk drive manufacturers and then to transfer
the technology to them or their designated head and disk suppliers for
production of heads, media and disk drives. Currently, Censtor has sold licenses
to nine disk drive and disk drive component manufacturers (IBM, Fujitsu,
Hitachi, Maxtor, NEC, MiniStor, Western Digital, Denka and Read-Rite) who bought
the licenses based upon their expectations that the Company's technologies may
be used in the future. To date, however, no products utilizing the Company's
technology have been introduced and there can be no assurance that such products
will ever be introduced or marketed. Although certain of the Company's licenses,
including the Read-Rite license, do not bear royalties, the Company believes
that if Read-Rite or another licensee introduces products using Censtor
technology, licensees with royalty-bearing licenses and potential licensees will
be encouraged to develop, introduce, and manufacture their own products
utilizing this technology.
BUSINESS STRATEGY
Censtor's strategy is to perfect its patent protection and proprietary
rights to the disk drive technology developed by it over the last 14 years, and
to exploit that technology through licensing or other strategic transactions
with disk drive manufacturers and other related companies.
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MAINTENANCE AND ENHANCEMENT OF PATENT PORTFOLIO
To protect and enhance its large investment in head and media
development, the Company maintains an aggressive patent prosecution strategy and
has obtained several patents covering low mass recording heads. The Company's
patent portfolio currently includes 17 issued United States patents, 14 pending
United States patent applications, ten foreign patents and a number of foreign
patent applications. With respect to its micro Flexhead(R) components in
particular, the Company has three issued United States patents covering the
structure, manufacturing process for and application of low-mass contact
recording devices and two additional United States patents covering improvements
and advances relating to those patents. The Company believes its patents may
create substantial barriers to entry for competing technologies which
incorporate heads with very low effective mass for either contact or flying head
recording.
SALES, MARKETING AND DISTRIBUTION
By creating license relationships with disk drive manufacturers, the
Company has been building a base of potential customers for components using its
technology. The Company has initially targeted disk drive companies focused on
the personal computer and small form factor market segments where the Company
believes the advantages of its technology should be most compelling. Integrated
computer and disk drive or component manufacturing companies have recognized
that low mass contact recording is likely to be required to achieve the
increases in areal storage densities necessary to sustain future drive product
generations. These companies have shown a willingness to invest today in order
to acquire access to and start learning to use what they perceive may be an
important recording technology in the future. Accordingly, the Company has
already sold licenses to several such companies, including IBM, Fujitsu, NEC,
Denka, Hitachi, and most recently Read-Rite and Western Digital as well as OEM
disk drive manufacturers Maxtor and MiniStor.
MiniStor, which was operating under protection of Chapter 11 of the
United States Bankruptcy Code, has sold all of its assets and is no longer
operational. However, the Company is not dependent upon, nor did it plan to
derive a significant portion of its revenues from, sales to MiniStor.
RESEARCH AND DEVELOPMENT
The Company had been spending between $8.0 million and $12.0 million
annually over the last three years on its research and development activities.
These R&D operations have been assumed by Read-Rite as part of the Read-Rite
Transaction, and all of the Company's R&D employees have accordingly been hired
by Read-Rite as of February 1996.
MANUFACTURING ACTIVITIES
The Company's former manufacturing operations have been assumed by
Read-Rite as part of the Read-Rite Transaction and all of the Company's
manufacturing employees have been hired by Read-Rite. Accordingly, the Company
has focused its efforts on licensing its technology and will rely on its
licensees and their designated suppliers to manufacture any products based upon
the Company's technology.
COMPETITION AND TECHNOLOGICAL CHANGE
The disk drive component industry is intensely competitive.
Participants in the industry include both independent component suppliers as
well as large disk drive and computer manufacturers that supply their internal
component requirements. These companies have greater financial, marketing and
technological resources than the Company. The Company also competes with
companies offering products based on alternative data storage and retrieval
technologies. Technological advances in magnetic, optical, semiconductor or
other technologies, or the development of new technologies, could result in the
introduction of competitive products with superior performance to and
substantially lower prices than the Company's technology can provide, which
could render the Company's technology noncompetitive or obsolete, thereby
adversely affecting the Company's results of operations.
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The market for the Company's technology is intensely competitive and
characterized by rapidly changing advances in head and media technologies. These
advances result in frequent product introductions, short product life cycles and
increased product capabilities that may result in significant performance
improvements and price reductions. Specifically, the Company is subject to
competition from manufacturers of thin film inductive and MR heads, as well as
thin film media based on use of conventional flying head and longitudinal
recording technologies. Head and media product performance has been improving
steadily due to a combination of increased transducer efficiency, improved media
performance, smaller slider size, lower flying heights, and pseudo-contact heads
and it is expected to continue to improve. In addition to enabling lower flying
heights, the cost of advanced inductive flying heads is being decreased by the
reduction in the size of the slider, which permits fabrication of more sliders
per wafer. There can be no assurance that the Company's potential performance
and manufacturing cost advantages will be realized in practice or can be
maintained over the improvements to conventional inductive heads.
LICENSES WITH DISK DRIVE AND COMPONENT MANUFACTURERS
As of September 15, 1996, the Company had entered into license
agreements with seven of the roughly twenty-five disk drive manufacturers in the
world: IBM, Fujitsu, Hitachi, Maxtor, MiniStor, NEC, and Western Digital, and
with two component manufacturers - Denka and Read-Rite. The Company has executed
license agreements with initial license fees of $25.5 million from these
licensees (including $8.0 million associated with the Read-Rite Transaction,
certain portions of which are subject to offset as described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations".) In
addition, the Company has received $7.5 million of non-refundable advance
royalty payments. Some of these agreements provide that no future licenses
granted by the Company will be more favorable than the existing licenses and
that the licensee may grant restricted sub-licenses to component suppliers.
Others permit the licensees to acquire the right to appoint subcontractors in
exchange for the payment of additional license fees and royalties. The specific
terms of the license agreements vary depending on when the licenses were entered
into, whether or not the Company has rights to future royalty payments from the
licensee, whether the license extends to not only the Company's patents but also
its trade secret information, and whether the licensee is expected to become a
component supplier. In August 1996, the Company entered into a world-wide,
non-exclusive license agreement with Western Digital Corporation by assigning a
Promissory Note between a subsidiary of the Company and Western Digital to
Censtor and converting this Note to a license.
ENVIRONMENTAL REGULATIONS
The Company has been subject to a variety of governmental regulations
relating to the use, storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture and test the Company's micro Flexhead(R) component. The Company
believes that as of the closing date of the Read-Rite Transaction it was in
compliance in all material respects with such regulations and that it had
obtained all necessary environmental permits to conduct its business. Any
failure in the past by the Company to control the use, disposal or storage of,
or adequately restrict the discharge of, hazardous or toxic substances could
subject the Company to significant liabilities and could significantly reduce
the amount of the final $2.0 million payment due from Read-Rite in April 1997.
HUMAN RESOURCES
As of June 30, 1996, the Company had 6 full-time employees, all engaged
in general and administrative functions. The Company is highly dependent upon
certain members of its management team, the loss of service of one or more of
whom could adversely affect the Company. The Company has only limited
management, operational and financial resources and the Company's success will
depend in large part on its ability to retain and, if necessary, attract skilled
and experienced employees. None of the Company's employees is covered by a
collective bargaining agreement or employment contract and the Company considers
its relations with its employees to be good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of June 30,
1996, are as follows:
NAME AGE POSITION
- ---- --- --------
Russell M. Krapf 49 Chief Executive Officer, President and Director
B. Kipling Hagopian 54 Chairman of the Board
James A. Cole 53 Director
Garrett A. Garrettson 53 Director
Paul R. Low 63 Director
Richard C. E. Morgan 52 Director
Edwin V.W. Zschau 56 Director
RUSSELL M. KRAPF was appointed Chief Executive Officer and President in
April 1996. He had rejoined Censtor as Senior Vice President, Corporate
Development and Component Supply in August 1993. Mr. Krapf has been associated
with Censtor since February 1988, at which time he was appointed Vice President,
Operations and from February 1990 to February 1992 served as President and Chief
Operating Officer of the Company. From February 1992 to June 1992, Mr. Krapf
served as President of California Micro Devices Corporation after which time he
returned to the Company as a consultant. Mr. Krapf received a B.S. in
Engineering Science from Florida State and an M.B.A. from Boston University. Mr.
Krapf has also served for five years as President and a Director of IDEMA (a
trade association for the disk drive industry).
B. KIPLING HAGOPIAN joined the Company's Board of Directors in November
1981 and became Chairman in 1993. He resigned as Chairman at the July 11, 1996
Board of Directors Meeting but remains an outside director of the Company. In
1972, Mr. Hagopian founded Brentwood Associates, one of the largest high
technology venture capital investment companies in the United States, and has
been a General Partner since that time. Mr. Hagopian is also a member of the
Board of Directors of Natural Language, Inc. and Performance Semiconductor
Corporation. Mr. Hagopian received his B.A. and M.B.A. from the University of
California at Los Angeles.
JAMES A. COLE joined the Company's Board of Directors in October 1992.
Since 1986, Mr. Cole has been the Managing General Partner of Spectra Enterprise
Associates, and a Partner of New Enterprise Associates, both private venture
capital partnerships. Mr. Cole is also a director of Gigatronics, Inc.,
Spectrian Corp. and Vitesse Semiconductor Corp., all public companies. Mr. Cole
is a graduate of the University of California Graduate School of Management at
Los Angeles.
GARRETT A. GARRETTSON joined Censtor in February 1993 as Chief
Technical Officer, and became President and Chief Executive Officer in April
1993. He subsequently resigned in April 1996 to accept the position of CEO and
President of Spectrian Corp. Dr. Garrettson remains on Censtor's Board of
Directors and also serves on the Board of Directors for Benton Oil and Gas.
Before joining the Company, Dr. Garrettson served as Vice President of Product
Strategy and Engineering of Seagate Technology, Inc. beginning in August 1990,
and served as Vice President of Engineering and Product Line Management
(responsible for Minneapolis Disk Drive Operations) at Imprimis Technology
(Control Data Corp.) for four years beginning in October 1986. Dr. Garrettson
attended Stanford University where he earned B.S. and M.S. degrees in
Engineering Physics, and a Ph.D. in Mechanical Engineering (Nuclear).
PAUL R. LOW joined the Company's Board of Directors in March 1993. He
has subsequently left the board effective July 11, 1996. In July 1992, Dr. Low
formed PRL Associates, a technology consulting firm and became an advisory
partner of Weiss, Peck & Greer, a venture capital firm. From 1957 to July 1992,
Dr. Low served in various positions at IBM where he was promoted to General
Manager of Technology Products,
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appointed to the Corporate Management Board and became President of the General
Products Division. Dr. Low is also a member of the Board of Directors of Applied
Materials, Inc. and Solectron Corporation, both publicly traded companies, as
well as the following private companies: CMX Corporation, IPAC, and Dynalogic.
Dr. Low received his B.S. and M.S. from the University of Vermont and earned his
Ph.D. in Electrical Engineering from Stanford University.
RICHARD C.E. MORGAN joined the Company's Board of Directors in June
1990. Mr. Morgan has subsequently left the Board effective July 11, 1996. He has
served as a General Partner of Wolfensohn Partners L.P. since June 1986. Mr.
Morgan is also a director of Quidel, Inc., Celgene Corporation, Lasertechnics,
Inc., MediSense, Inc. and Liposome Technology, Inc. Mr. Morgan received his B.S.
in Engineering from the University of Auckland and his M.B.A. from Harvard
Business School.
EDWIN V.W. ZSCHAU is a Senior Lecturer of Business Administration at
Harvard University. Dr. Zschau was appointed to the Company's Board of Directors
in December 1995, to the Company's Compensation Committee in April 1996, and was
elected Chairman of the Board on July 11, 1996. Prior to Harvard University, he
was General Manager of the IBM Storage Systems Division from April 1993 until
July 1995. Prior to that, he served as Chairman and CEO of Censtor Corp. from
July 1988 to April 1993. Before joining Censtor, Dr. Zschau was a General
Partner of Brentwood Associates, a venture capital firm, and prior to that he
served two terms in the U.S. House of Representatives from January 1983 until
January 1987. Dr. Zschau has an A.B. degree from Princeton University and
M.B.A., M.S. and Ph.D. degrees from Stanford University. He serves as a Director
of GenRad, Inc. and Identix Incorporated. The Company was late on filing one
Form 3 with the Securities and Exchange Commission in fiscal 1996 on behalf of
Dr. Zschau.
ITEM 2. PROPERTIES
The Company's corporate offices consist of approximately 2,000 square
feet of office space located in San Jose, California. The Company's lease on
this facility expires on May 2, 1999. The Company believes that its existing
facility will be adequate to meet the Company's needs throughout 1997. Should
the Company need additional space, management believes that the Company will be
able to secure additional space at reasonable rates. The Company formerly leased
approximately 40,000 square feet located in San Jose, California. Although this
lease was assigned to Read-Rite in connection with the Read-Rite Transaction,
the Company has agreed, at the request of the landlord, to remain liable for
Read-Rite's obligations under such lease.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 11, 1996, the Company's annual meeting of shareholders was
held. At this meeting, the shareholders elected each of James A. Cole, Garrett
A. Garrettson, B. Kipling Hagopian, Edwin V.W. Zschau and Russell M. Krapf to
serve as directors of the Company until the next annual Meeting of Shareholders
or until a successor has been duly elected and qualified. Each of these
directors received 12,842,683 votes in favor of his election with 2,836,283
abstentions. At the annual meeting, the shareholders also ratified the
appointment of Ernst & Young LLP as the Company's independent auditors with
12,832,683 shares voting in favor of such ratification, 10,000 shares opposed
and 2,836,283 shares abstaining. In addition, at the annual meeting, the
shareholders approved the Read-Rite Transaction with 15,628,896 shares voting in
favor, 10,070 shares opposed and 40,000 shares abstaining.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
As of June 30, 1996, the Company had outstanding 9,303,344 shares of
common stock held by 148 shareholders, 6,617,299 shares of Series A Preferred
Stock held by 15 shareholders and 8,370,508 shares of Series B Convertible
Preferred Stock held by 557 shareholders. There is no established public trading
market for any class of the Company's equity securities.
The Company has not paid any dividends on any of its capital stock and
does not anticipate that any cash dividends will be declared in the foreseeable
future. The holders of Preferred Stock are entitled to certain preferences with
respect to dividends and other preferences.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues-License fees ................ $ 6,007,634 $ 2,682,666 $ 7,845,799 $ 3,515,472 $ 3,202,704
Expenses:
Research and development ........ 9,633,250 9,411,161 11,723,752 11,448,501 8,261,638
Selling, general & administrative 1,502,372 2,126,641 2,372,255 2,846,235 2,393,233
------------ ------------ ------------ ------------ -------------
Total expenses .............. 11,135,622 11,537,802 14,096,007 14,294,736 10,654,871
------------ ------------ ------------ ------------ -------------
Operating loss ....................... (5,127,988) (8,855,136) (6,250,208) (10,779,264) (7,452,167)
Interest and other income (expense) .. (1,017,988) (1,863,683) (1,486,025) (959,146) (1,032,112)
Minority interest in loss of
subsidiary ........................... -- -- -- 81,650 194,642
------------ ------------ ------------ ------------ -------------
Loss before income tax expense ....... (6,145,976) (10,718,819) (7,736,233) (11,656,760) (8,289,637)
Income tax expense ................... 530,000 -- -- 290,350 319,450
------------ ------------ ------------ ------------ -------------
Net loss ............................. $ (6,675,976) $(10,718,819) $ (7,736,233) $(11,947,110) $ (8,609,087)
============ ============ ============ ============ =============
Net loss per share ................... $ (0.72) $ (1.17) $ (0.84) $ (1.29) $ (0.93)
============ ============ ============ ============ =============
Weighted average number of shares .... 9,248,000 9,190,000 9,211,000 9,255,000 9,301,000
used in computing per share amount
BALANCE SHEET DATA:
Cash and cash equivalents ............ $ 331,202 $ 3,136,240 $ 8,613,200 $ 1,368,891 $ 199,998
Working capital (deficiency) ......... (6,392,269) (6,298,326) 6,215,308 (2,878,918) (8,406,743)
Total assets ......................... 2,098,955 6,471,377 12,627,804 4,519,001 1,481,767
Long term obligations, excluding ..... 12,295,167 25,510,479 14,309,130 14,304,589 14,488,311
current maturities
Accumulated deficit .................. (68,895,201) (79,614,020) (87,350,253) (99,297,363) (107,906,450)
Net capital deficiency ............... (18,694,313) (29,409,664) (4,365,839) (14,515,928) (22,649,811)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless otherwise indicated, references to years in this
section refer to fiscal years ending June 30.
The following discussion and analysis contains forward-looking
statements regarding future events or the future financial performance of
Censtor that involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in the documents the
Company files from time to time with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in 1981 to develop perpendicular recording
technology, and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from
perpendicular to longitudinal contact recording technology. To date, the
Company's principal source of revenue has been license fees from disk drive
manufacturers. While the Company's license agreements typically provide for
on-going royalty payments by licensees based upon sales of products
incorporating the Company's technology, to date none of the Company's licensees
has commercialized products using the Company's technology and the Company has
received no recurring royalty revenue. The Company has not been profitable in
any fiscal period since inception and, as of June 30, 1996, had an accumulated
deficit of $107.9 million. There can be no assurance that the Company will
achieve or sustain significant revenues or profitability in the future.
Censtor's operating plans for fiscal 1997 focus on the perfection of
the Company's patent protection and other proprietary rights and the possible
exploitation of such rights through licenses or other strategic transactions
with disk drive manufacturers and other related companies. The Company expects
to finance these operations through payments from Read-Rite in connection with
the Read-Rite Transaction and possibly through sales of additional licenses.
There can be no assurance that the Company will be able to sustain its
operations beyond 1997 without the sale of such additional licenses.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private placements of its equity and debt securities and, to a lesser
extent, through licensing and research and development agreements. During the
fiscal year ended June 30, 1994, the Company generated net cash from financing
activities of $17.7 million, primarily reflecting the sale of Series B
Convertible Preferred Stock. In 1995, net cash provided by financing activities
was $832,000, resulting primarily from proceeds of $2.0 million from the sale of
preferred stock of a subsidiary of the Company which was partially offset by
$1.1 million of principal payments on capital leases. In 1996 the Company
generated net cash of $6.6 million resulting primarily from $7.5 million in
Notes Payable and short term borrowing offset by $1.4 million in capital lease
payments. During fiscal 1994, 1995 and 1996, the Company used net cash in its
operations of $13.2 million, $8.3 million, and $8.1 million respectively. In
1995 and 1996, the Company received payments of license fees and non-refundable
prepaid royalties from several licensees, which caused net cash used in
operations to be less than the Company's net loss. In addition, particularly in
1995 and 1996, the Company delayed payments on accounts payable to conserve cash
prior to completion of then-anticipated new financing.
The Company generated net cash from investing activities of $1.0
million in 1994 consisting of $1.7 million used for additions to property and
equipment and $2.8 million provided by proceeds from the sale and leaseback, and
sale of fixed assets. In 1995, with a similar transaction, the Company generated
net cash from investing activities of $205,000 consisting of $379,000 used for
additions to property and equipment and $584,000 provided by proceeds from the
sale and leaseback, and sale of fixed assets. In 1996 the Company
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generated net cash from investment activities of $358,000 consisting of $192,000
used for additions to property and equipment and $550,000 provided by proceeds
from the sale and leaseback, and sale of fixed assets.
The Company's ability to fund its cash requirements through fiscal
1997 depends largely upon its success in collecting $2.5 million from Read-Rite,
the remainder of the aggregate purchase price of $9.0 million for the assets and
license sold in the Read-Rite Transaction. This hold-back amount is payable to
the Company in installments from November 15, 1996 through April 18, 1997,
subject to certain conditions, and is subject to reduction for any claims by
Read-Rite for damages in the event the Company breaches or has breached the
Asset Sale Agreement or License Agreement entered into by the Company in
connection with the Read-Rite Transaction. The Company is not aware of any such
claims at the present time. The Company also continues to seek new licensees.
However, there can be no assurance that the Company can enter into a new license
agreement in fiscal 1997 or at any subsequent time. Any such failure would have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's commitments for cash payments in fiscal
year 1997 are primarily for operating expenses, which are currently expected to
decrease, in the aggregate, as compared to operating expenses incurred during
fiscal 1996 due to the Company's reduction in size and scope of operations. See
"Note 2 of Notes to Consolidated Financial Statements."
If the Company is successful in collecting a significant portion of the
remaining fee due from Read-Rite, which it anticipates doing, it believes that
it will be able to finance its operations during fiscal 1997. There can be no
assurance, however, that the Company will be successful in this endeavor or that
the amount actually collected will be adequate to fund the Company's operations.
RESULTS OF OPERATIONS
Revenues
The Company's major revenue source has been fees from license
agreements with disk drive manufacturers. License fees are generally recognized
over the estimated period in which the Company expects to provide support in
connection with the license. All deferred revenue pertaining to licenses sold to
disk drive manufacturers have been recognized as revenue in fiscal 1996 since
the Company can no longer provide technical support to its licensees as a result
of the Read-Rite Transaction. The license fee from Read-Rite in connection with
the Read-Rite Transaction will be recognized over a period of six years.
The Company's revenues were $7.8 million, $3.5 million and $3.2 million
in 1994, 1995 and 1996 respectively. Of these revenues, approximately $1.8
million in 1994 represented revenues from related parties. In June 1993, the
Company entered into a license agreement with IBM, which contributed $4.1
million to the Company's revenues in 1994. In addition, in October 1993, the
Company entered into a technical assistance agreement, whereby the Company
granted the right to priority access by Daido to training and technical
assistance by the Company in developing manufacturing capabilities for certain
components. The Company received approximately $1.7 million from Daido in fiscal
year 1994 under this agreement. The Daido agreement expired in October 1994.
Revenues in 1995 consisted primarily of the amortization of the Hitachi license
that was sold in December 1994. Revenues in fiscal 1996 consisted primarily of
the continued and complete amortization of the Hitachi license fee as well as
the NEC license sold in August 1995.
Research and Development
Research and development ("R&D") expenses decreased slightly from
$11.7 million in 1994 to $11.4 million in 1995, and decreased significantly to
$8.3 million in 1996. This large decrease is attributed to Read-Rite's hiring of
most of Censtor's employees on February 5, 1996 and subsequent acquisition of
the Company's research and
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development operations. In the future, as a result of the Read-Rite Transaction,
the Company expects no material R&D expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $2.4
million in 1994 to $2.8 million in 1995 and decreased to $2.4 million in 1996.
The increase in 1995 resulted primarily from an increase in legal fees for
patent filings and legal fees associated with establishing a subsidiary. The
decrease in 1996 was due to reduction of the use of outside legal counsel for
patent filings because the Company hired an "in-house" patent counsel in April
1995.
Interest and Other Income (Expense)
Interest expense consists primarily of interest on the Company's
outstanding indebtedness and capital leases. Interest expense decreased from
$1.7 million in 1994 to $1.1 million in 1995 and increased to $1.2 million in
1996. The decrease in 1995 is attributable to the pay down of existing leases.
The increase in 1996 was caused primarily by interest on certain investor notes,
a bank loan, and Promissory Notes provided by Read-Rite offset by the pay down
of existing leases.
Interest income is the result of interest earned on the temporary
investment of the Company's cash pending its use in operations. Interest income
decreased from $200,000 in 1994 to $173,000 in 1995 and to $5,000 in 1996. This
large decrease in 1996 was due to the substantial decrease of the Company's cash
balances in interest bearing accounts over the course of the year.
Income Taxes
As of June 30, 1996, the Company had federal net operating loss and
credit carryforwards of approximately $98.0 million and $3.3 million,
respectively, expiring in various years beginning in 1997 through 2010. The
Company also has state net operating loss and credit carryforwards of
approximately $31.0 million and $1.2 million respectively. The state operating
loss carryforwards will expire in various years beginning in 1997 through 2001
while the credit carryforwards will expire in various years beginning in 2003
through 2011. Tax law provides that the use of net operating loss and credit
carryforwards are restricted if there is a substantial change in the ownership
of the Company. Due to prior years' equity transactions, such a change has
occurred. Approximately $75.0 million of federal net operating loss and all
credit carryforwards are subject to an annual limitation. The annual limitation
is approximately $1.2 million per year. The balance of $22.0 million federal net
operating loss carryforwards can be used without limitation. Similar limitations
apply to state carryforwards. A subsidiary of the Company has a federal net
operating loss carryforward of approximately $7.5 million. Income tax expense
in 1995 and 1996 represents foreign withholdings in connection with license
agreements.
Effect of Inflation
The Company believes that inflation has not had a material impact on
its operating or financial ratios during the year ended June 30, 1996 as
compared to the years ended June 30, 1995 and 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the Consolidated Financial Statements set forth on pages F-1 through F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
-11-
<PAGE> 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors and Executive Officers is included in
Part I hereof under the caption "Executive Officers of the Registrant" and is
incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the
compensation paid by the Company for the year ended June 30, 1996 to all persons
holding the position of the Chief Executive Officer during that year and each of
the other most highly compensated executive officers of the Company whose total
compensation exceeded $100,000:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------- COMPENSATION
------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SECURITIES UNDERLYING ALL OTHER
--------------------------- ---- ------ ----- OPTION(#)(1) COMPENSATION(2)
--------------------- --------------
<S> <C> <C> <C> <C> <C>
Garrett A. Garrettson(3) 1996 $232,690 $42,307 --- $1,056
Chief Executive Officer 1995 250,480 775 300,000 912
1994 250,000 480,224 1,056
Robert D. Hempstead(4)(5) 1996 109,613 31,446 --- 593
Vice President, Head Research 1995 161,290 40,000 200,000 746
and Development 1994 110,381 25,000 75,330 427
Russell M. Krapf(6) 1996 184,381 64,132 75,000 898
President, Chief Executive 1995 166,730 26,650 100,000 775
Officer 1994 174,952 14,425 94,161 707
</TABLE>
- ------------------------
(1) The stock options granted to the named officers vest as to 1/48 of the
shares per month at the end each month after the date of grant;
provided, however, that in certain cases options are not first
exercisable until six months after the date of grant. The options are
exercisable at a price of $0.40 per share and expire ten years from the
date of grant.
(2) Reflects premiums paid by the Company on behalf of the named officers
for term life insurance with benefits payable to beneficiaries
designated by the officers.
(3) Dr. Garrettson resigned his position as CEO of the Company effective
April 22, 1996.
(4) Dr. Hempstead was hired by Read-Rite on February 5, 1996 as part of the
Read-Rite Transaction.
(5) Of the total bonus amount, $20,800 was accrued at June 30, 1996 and
paid in July, 1996.
(6) Of the total bonus amount, $54,478 was accrued at June 30, 1996 and
paid in July, 1996.
-12-
<PAGE> 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding shares of Common Stock and
Preferred Stock (on an as converted basis) as of September 15, 1996 by (i) each
person known to the Company beneficially to own 5% or more of the outstanding
shares of its Common Stock or Preferred Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers named in the Summary
Compensation Table below, and (iv) all directors and executive officers as a
group. Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
TOTALS (2)
PREFERRED STOCK (1) COMMON STOCK ----------
------------------- ------------ NUMBER OF PERCENT
NAME OF OWNER NUMBER OF PERCENT NUMBER OF PERCENT COMMON OF COMMON
------------- SHARES OF CLASS SHARES OF CLASS EQUIVALENTS EQUIVALENTS
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED OWNED OWNED OWNED OWNED OWNED
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Brentwood Associates(3)................ 1,298,244 8.66% 3,438,593 36.96% 4,736,837 19.50%
11150 Santa Monica Boulevard,
Suite 1200
Los Angeles, CA 90025
Aeneas Venture Corporation(4).......... 2,938,225 19.60 0 0 2,938,225 12.10
600 Atlantic Avenue,
26th Floor
Boston, MA 02210-2203
Wolfensohn Partners L.P.(5)............ 413,172 2.76 1,066,211 11.46 1,479,383 6.09
599 Lexington Avenue
New York, NY 10022
J.P. Morgan Investment Corporation(6).. 363,796 2.43 1,060,244 11.40 1,424,040 5.86
60 Wall Street
New York, NY 10260-0060
New Enterprise Associates(7)........... 1,424,590 9.50 0 0 1,424,590 5.86
1119 St. Paul Street
Baltimore, MD 21202
Morgenthaler Venture Partners(8)....... 314,669 2.10 798,830 8.59 1,113,499 4.58
700 National City Bank Building
Cleveland, OH 44114
Fujitsu Limited........................ 0 0 784,682 8.43 784,682 3.23
1015 Kamikodanaka
Nakahara-ku, Kawasaki-shi
Kanagawa-ken 211
Japan
Garrett A. Garrettson(9)............... 0 0 592,690 5.99 592,690 2.38
B. Kipling Hagopian(10)................ 1,298,244 8.66 3,438,593 36.96 4,736,837 19.50
Harold J. Hamilton(11)................. 0 0 313,833 3.36 313,833 1.29
Russell M. Krapf(12)................... 0 0 259,840 2.75 259,840 1.06
Paul R. Low(13)........................ 0 0 21,087 * 21,087 *
Richard C.E. Morgan(14)................ 413,172 2.76 1,075,627 11.56 1,488,799 6.13
James A. Cole(15)...................... 1,424,590 9.50 0 0 1,424,590 5.86
All directors and executive officers as 3,136,006 20.92 5,655,851 48.59 8,791,857 33.02
a group (7 persons)(16)................
</TABLE>
- -----------------------
* Less than one percent
-13-
<PAGE> 14
(1) Includes Series A Preferred and Series B Preferred. Preferred Stock is
reflected on an as-converted to Common Stock basis. As of October 20,
1995, each share of Series A and Series B Preferred converts into one
share of Common Stock.
(2) Reflects Preferred Stock (on an as-converted to Common Stock basis) and
Common Stock combined.
(3) Includes: 1,257,196; 2,366,978; 875,764; and 236,899 shares held
respectively by Brentwood Associates II, Brentwood Associates III,
Brentwood Associates IV and Evergreen II, L.P., of which 229,289;
429,253; 60,002; and 43,343 shares, respectively, are shares of the
Company's Series A Preferred, and 108,494; 222,972; 82,519; and 22,372
shares, respectively, are shares of the Company's Series B Preferred.
Mr. Hagopian, the Chairman and a Director of the Company is a General
Partner of Brentwood Associates. Mr. Hagopian disclaims beneficial
ownership of the shares owned by Brentwood Associates.
(4) Includes 2,678,141 shares of the Company's Series A Preferred and
260,084 shares of the Company's Series B Preferred.
(5) Includes 273,116 shares of the Company's Series A Preferred and 140,056
shares of the Company's Series B Preferred. Richard C.E. Morgan, a
former Director of the Company, is a General Partner of Wolfensohn
Partners L.P. Mr. Morgan disclaims beneficial ownership of the shares
held by Wolfensohn Partners L.P.
(6) Includes 223,796 shares of the Company's Series A Preferred and 140,000
shares of the Company's Series B Preferred.
(7) Includes 1,274,853 and 149,737 shares held respectively by New
Enterprise Associates V ("NEA") and Spectra Enterprise Associates
("Spectra"), of which 1,071,256 and 131,788 shares, respectively, are
shares of the Company's Series A Preferred and 203,597 and 17,949
shares, respectively, are shares of the Company's Series B Preferred.
NEA and Spectra are independent partnerships; however, the General
Partners of Spectra are also General Partners of NEA. James A. Cole, a
Director of the Company, is a Partner of NEA and the Managing General
Partner of Spectra. Mr. Cole disclaims beneficial ownership of the
shares owned by NEA and Spectra.
(8) Includes 332,352 and 784,335 shares held respectively by Morgenthaler
Venture Partners and Morgenthaler Venture Partners II.
(9) Includes 592,690 shares subject to stock options which are exercisable
within 60 days of September 15, 1996.
(10) Includes shares beneficially owned or held of record by entities
associated with Brentwood Associates, as described in footnote 3 above.
Mr. Hagopian is a General Partner of Brentwood Associates. Mr. Hagopian
disclaims beneficial ownership of such shares.
(11) Includes (i) 282,144 shares held in trust for the benefit of Mr.
Hamilton, (ii) 5,648 shares held by Mr. Hamilton's two children, as to
which shares he disclaims beneficial ownership, and (iii) 26,041 shares
subject to stock options which are exercisable within 60 days of
September 15, 1996.
(12) Includes 148,102 shares subject to stock options which are exercisable
within 60 days of September 15, 1996.
(13) Includes 21,087 shares subject to stock options which are exercisable
within 60 days of September 15, 1996.
(14) Includes shares beneficially owned or held of record by Wolfensohn
Partners L.P., as described in footnote 5 above. Mr. Morgan is a
General Partner of Wolfensohn Partners L.P. Mr. Morgan disclaims
beneficial ownership of such shares.
(15) Includes shares beneficially owned or held of record by NEA and Spectra
as described in footnote 7 above. Mr. Cole is a Partner of NEA and the
Managing General Partner of Spectra. Mr. Cole disclaims beneficial
ownership of these shares.
(16) Includes 787,920 shares subject to stock options exercisable within 60
days of September 15, 1996. See Notes 9, 11, 12 and 13. Also includes
7,650,226 shares which may be deemed to be beneficially owned by
certain directors and officers. See Notes 10, 14 and 15.
-14-
<PAGE> 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Bylaws provide that the Company is required to indemnify
its officers and directors to the fullest extent permitted by California law,
including those circumstances in which indemnification would otherwise be
discretionary, and that the Company is required to advance expenses to its
officers and directors as incurred. Further, the Company has entered into
indemnification agreements with its officers and directors. The Company believes
that its charter and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
In December 1995, Edwin V.W. Zschau, the Chairman of the Board of the
Company, entered into a one year consulting agreement with the Company, whereby
the Company would pay Dr. Zschau $7,500 per month for up to three days service
per month to help develop and implement the Company's financing strategy as well
as for participation as a member of the Company's Board of Directors. Dr. Zschau
subsequently worked 30 days on the behalf of the Company during the period
December 1995 through March 1996, culminating with the Company entering into a
Letter of Intent with Read-Rite. The Company's Board agreed to modify this
agreement to pay Dr. Zschau $75,000 for the 30 days of work through March 31,
1996, and to terminate any future payments for consulting on financial strategy
issues. Dr. Zschau will be paid for attendance at Board of Director's meetings.
On January 31, 1996 the Company's Board of Directors approved a six
month performance bonus, amended on April 2, 1996, of approximately $137,500 to
be paid in semi-monthly installments commencing April 23, 1996, for Garrett A.
Garrettson.
Additionally, certain shareholders beneficially owning more than 5% of
the Company's capital stock have made loans to the Company in the first calendar
quarter of 1996. Fifty percent of the principal balances of these loans plus
accrued interest on that portion were repaid from the proceeds received by the
Company at the closing of the Read-Rite Transaction, while the remainder plus
accrued interest on the remaining portion will be repaid in April 1997.
The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties.
-15-
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1) Financial Statements.
The following Consolidated Financial Statements of Censtor
Corp. and subsidiaries, and the Report of Independent Auditors are included at
pages F-1 through F-18 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
----------- --------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................ F-1
Consolidated Balance Sheets as of June 30, 1996 and 1995......................... F-2
Consolidated Statements of Operations for each of the Three Years in the Period F-3
Ended June 30, 1996..............................................................
Consolidated Statements of Net Capital Deficiency for each of the Three Years in F-4
the Period Ended June 30, 1996...................................................
Consolidated Statements of Cash Flows for each of the Three Years in the Period F-5
Ended June 30, 1996..............................................................
Notes to Consolidated Financial Statements....................................... F-6
</TABLE>
2) Financial Statement Schedules.
No schedules have been filed as part of this report because
they are not applicable or are not required or the information required to be
set forth therein is included in the consolidated financial statements or notes
thereto.
3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 (5) Restated Articles of Incorporation of Registrant.
3.2 (1) Amended and Restated Bylaws of Registrant.
10.1 (1)(4) 1990 Stock Plan and Form of Option Agreement.
10.2 (1) Form of Indemnification Agreement entered into between the Company and
each of its directors and officers.
10.3 (1) Lease Agreement, dated November 28, 1983, between the Company and The
Sobrato Group, together with amendments thereto.
</TABLE>
-16-
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ------------
<S> <C>
10.4 (1)(2) License Agreement, dated September 23, 1991, between the Company and Maxtor
Corporation, as amended.
10.5 (1) (2) License Agreement, dated February 28, 1991, between the Company and Fujitsu
Limited, as amended.
10.6 (1) (2) Manufacturing License Agreement, dated August 26, 1988, between the Company and
Denki Kagaku Kogyo Kabushiki Kaisha, as amended.
10.7 (1) (2) License Agreement, dated June 1, 1993, between the Company and International
Business Machines Corporation.
10.8 (1) Denka Promissory Note.
10.9 (3) License Agreement, dated December 19, 1994, between Hitachi, Ltd. and the
Company.
10.10 (5) License Agreement, dated June 19, 1995, between Contact
Recording Technology, Inc. and the Company.
10.11 (2) License Agreement, dated August 7, 1995, between NEC Corporation and the Company.
10.12 (6) Agreement for Purchase and Sale of Assets by and between Read-Rite
Corporation and the Company.
10.13 (2) License Agreement, dated August 12, 1996, between Western Digital and
the Company.
10.14 Assignment of Lease and Consent to Assignment, dated July 2, 1996,
between The Sobrato Group, Censtor Corp. and Read-Rite Corp.
10.15 Fifth Amendment to Manufacturing License Agreement, dated February 22, 1996, with
Denki Kagaku Kogyo Kabushiki Kaisha.
10.16 Amendment to Terms of Debentures, dated February 22, 1996, with Denki Kagaku
Kogyo Kabushiki Kaisha.
10.17 License Agreement, dated July 18, 1996 between Read-Rite Corporation and the Company.
24 Power of Attorney (see signature page)
</TABLE>
- -------------------------
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 10 which became effective December 25,
1994.
(2) Confidential Treatment requested for portions of Exhibit.
(3) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1994.
(4) Document indicated is a compensatory plan.
(5) Incorporated by reference to exhibits filed with Registrant's Annual
report on Form 10-K, as amended, for the year ended June 30, 1995.
(6) Incorporated by reference to exhibit filed with Registrant's Proxy
Statement relating to the Registrant's 1996 Annual Meeting of
Shareholders.
-17-
<PAGE> 18
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on August 1, 1996 in connection with the
Closing of the Read-Rite Transaction.
(c) Exhibits
See response to Item 14(a)(3) above.
(d) Financial Statement Schedules
See response to Item 14(a)(2) above.
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Registrant
CENSTOR CORP.
September 25, 1996 By: /s/ Russell M. Krapf
----------------------
Russell M. Krapf
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Russell M. Krapf as his
attorneys-in-fact, with full power of substitution for him in any and all
capacities, to sign any and all amendments to this Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
--------- ------------------------ ----
<S> <C> <C>
/s/ Russell M. Krapf President, Chief Executive Officer and September 25, 1996
- ---------------------------------------- Director (Principal Executive Officer,
Russell M. Krapf Principal Financial and Accounting Officer)
/s/ Edwin V.W. Zschau Chairman of the Board September 25, 1996
- ----------------------------------------
Edwin V.W. Zschau
/s/ James A. Cole Director September 25, 1996
- ----------------------------------------
James A. Cole
/s/ Garrett A. Garrettson Director September 25, 1996
- ----------------------------------------
Garrett A. Garrettson
/s/ B. Kipling Hagopian Director September 25, 1996
- ----------------------------------------
B. Kipling Hagopian
</TABLE>
-19-
<PAGE> 20
CONSOLIDATED FINANCIAL STATEMENTS
CENSTOR CORP.
YEARS ENDED JUNE 30, 1995 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 21
CENSTOR CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors.................... F-1
Consolidated Balance Sheets as of June 30, 1995 and 1996............. F-2
Consolidated Statements of Operations for Each of the
Three Years in the Period Ended June 30, 1996...................... F-3
Consolidated Statements of Net Capital Deficiency for Each of the
Three Years in the Period Ended June 30, 1996...................... F-4
Consolidated Statements of Cash Flows for Each of the
Three Years in the Period Ended June 30, 1996...................... F-5
Notes to Consolidated Financial Statements........................... F-6
<PAGE> 22
[ERNST & YOUNG LLP LETTERHEAD]
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Censtor Corp.
We have audited the accompanying consolidated balance sheets of Censtor Corp. as
of June 30, 1995 and 1996, and the related consolidated statements of
operations, net capital deficiency, and cash flows for each of the three years
in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Censtor Corp. at
June 30, 1995 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
August 6, 1996
F-1
<PAGE> 23
CENSTOR CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 1,368,891 $ 199,998
Receivables ................................... 27,345 14,336
Prepaid expenses and other current assets ..... 326,436 111,135
Property and equipment held for sale .......... -- 911,055
----------- ----------
Total current assets ............................ 1,722,672 1,236,524
Property and equipment, at cost:
Machinery and equipment ....................... 13,345,115 45,703
Leasehold improvements ........................ 932,226 --
----------- ----------
14,277,341 45,703
Accumulated depreciation and amortization ..... 11,760,186 33,880
----------- ----------
2,517,155 11,823
Restricted cash ................................. 94,450 94,450
Deposits and other assets ....................... 184,724 138,970
----------- ----------
Total assets .................................... $ 4,519,001 $1,481,767
=========== ==========
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Short-term borrowings ............................. $ -- $ 6,450,000
Accounts payable .................................. 703,111 974,889
Notes payable to related parties .................. -- 1,000,000
Accrued payroll and related expenses .............. 437,451 232,278
Deferred revenue .................................. 2,062,498 --
Other current liabilities ......................... 58,315 378,257
Obligations under capital leases .................. 1,340,215 607,843
------------ -------------
Total current liabilities ........................... 4,601,590 9,643,267
Long-term obligations:
Obligations under capital leases .................. 633,134 --
Subordinated debentures ........................... 13,671,455 14,488,311
Commitments
Minority interest of subsidiary ..................... 128,750 --
Net capital deficiency:
Convertible preferred stock, no par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 14,987,807 in 1995
and 1996 ....................................... 32,509,031 32,509,031
Common stock, no par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 9,300,469 in 1995
and 9,303,344 in 1996 .......................... 50,507,497 50,508,593
Warrants to purchase shares of preferred
stock - 988,318 in 1995 and 1,098,318 in 1996 .... 253,050 253,050
Capital surplus ................................... 1,789,600 2,263,708
Accumulated deficit ............................... (99,297,363) (107,906,450)
------------ -------------
(14,238,185) (22,372,068)
Notes receivable from shareholders ................ (277,743) (277,743)
------------ -------------
Net capital deficiency .............................. (14,515,928) (22,649,811)
------------ -------------
Total liabilities and net capital deficiency ........ $ 4,519,001 $ 1,481,767
============ =============
</TABLE>
See accompanying notes.
F-2
<PAGE> 24
CENSTOR CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
License revenues:
Related party ........................ $ 1,756,053 $ -- $ --
Other ................................ 6,089,746 3,515,472 3,202,704
------------ ------------ ------------
Total revenues ......................... 7,845,799 3,515,472 3,202,704
Costs and expenses:
Research and development ............. 11,723,752 11,448,501 8,261,638
Selling, general, and administrative . 2,372,255 2,846,235 2,393,233
------------ ------------ ------------
Total expenses ......................... 14,096,007 14,294,736 10,654,871
------------ ------------ ------------
Operating loss ......................... (6,250,208) (10,779,264) (7,452,167)
Interest income ........................ 199,744 173,379 5,481
Interest expense ....................... (1,658,790) (1,106,488) (1,183,680)
Other income (expense), net ............ (26,979) (26,037) 146,087
Minority interest in loss of subsidiary -- 81,650 194,642
------------ ------------ ------------
Loss before income tax expense ......... (7,736,233) (11,656,760) (8,289,637)
Income tax expense ..................... -- (290,350) (319,450)
------------ ------------ ------------
Net loss ............................... $ (7,736,233) $(11,947,110) $ (8,609,087)
============ ============ ============
Net loss per share ..................... $ (0.84) $ (1.29) $ (0.93)
============ ============ ============
Weighted average number of shares
used in computing per share amounts
(in thousands) ....................... 9,211 9,255 9,301
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 25
CENSTOR CORP.
CONSOLIDATED STATEMENTS OF NET CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
CONVERTIBLE WARRANTS TO PURCHASE
PREFERRED STOCK COMMON STOCK PREFERRED STOCK
-------------------------- --------------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 ........... -- $ -- 9,192,168 $ 50,304,914 -- $ --
Issuance of warrants in connection
with capital leases, exercisable
at $2.50 per share .............. -- -- -- -- 301,318 150,000
Exercise of warrants for cash .... -- -- 6,316 1,845 -- --
Conversion of secured
convertible debentures and
accrued interest into Series A
preferred stock.................. 6,617,299 14,055,143 -- -- -- --
Issuance of Series B preferred
stock, net of issuance costs of
$2,468,169, including issuance
of warrants to sales agent,
exercisable at $2.50 per share .. 8,370,508 18,458,101 -- -- 687,000 103,050
Repayment of note receivable ..... -- -- -- -- -- --
Issuance of common stock ......... -- -- 41,186 16,604 -- --
Net loss ......................... -- -- -- -- -- --
---------- ------------ ---------- ------------ --------- --------
Balance at June 30, 1994 ........... 14,987,807 32,513,244 9,239,670 50,323,363 988,318 253,050
Issuance of Series B preferred
stock, net of issuance costs .... -- (4,213) -- -- -- --
Issuance of common stock ......... -- -- 35,055 11,634 -- --
Cancellation of note receivable .. -- -- (10,334) (103,500) -- --
Net exercise of warrants in
connection with capital leases. -- -- 36,078 276,000 -- --
Issuance of warrants in connection
with capital leases, exercisable
at $2.50 per share............... -- -- -- -- -- --
Capital surplus from investment
in subsidiary..................... -- -- -- -- -- --
Net loss ......................... -- -- -- -- -- --
---------- ------------ ---------- ------------ --------- --------
Balance at June 30, 1995 ........... 14,987,807 32,509,031 9,300,469 50,507,497 988,318 253,050
Issuance of common stock ......... -- -- 2,875 1,096 -- --
Issuance of warrants in
connection with bank line of
credit........................... -- -- -- -- 110,000 --
Expiration of warrants in
connection with capital leases .. -- -- -- -- -- --
Capital surplus from investment
in subsidiary.................... -- -- -- -- -- --
Net loss ......................... -- -- -- -- -- --
---------- ------------ ---------- ------------ --------- --------
Balance at June 30, 1996 ........... 14,987,807 $ 32,509,031 9,303,344 $ 50,508,593 1,098,318 $253,050
========== ============ ========== ============ ========= ========
<CAPTION>
WARRANTS TO PURCHASE NOTES
COMMON STOCK RECEIVABLE TOTAL
------------------------ CAPITAL ACCUMULATED FROM NET CAPITAL
SHARES AMOUNT SURPLUS DEFICIT SHAREHOLDERS DEFICIENCY
-------- ----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 ........... 230,582 $ 276,000 $ -- $ (79,614,020) $ (376,558) $(29,409,664)
Issuance of warrants in connection
with capital leases, exercisable
at $2.50 per share .............. -- -- -- -- 150,000
Exercise of warrants for cash .... (6,316) -- -- -- -- 1,845
Conversion of secured
convertible debentures and
accrued interest into Series A
preferred stock.................. -- -- -- -- -- 14,055,143
Issuance of Series B preferred
stock, net of issuance costs of
$2,468,169, including issuance
of warrants to sales agent,
exercisable at $2.50 per share .. -- -- -- -- -- 18,561,151
Repayment of note receivable ..... -- -- -- -- 4,125 4,125
Issuance of common stock ......... -- -- -- -- (8,810) 7,794
Net loss ......................... -- -- -- (7,736,233) -- (7,736,233)
-------- ----------- ------------ ------------- ------------ ------------
Balance at June 30, 1994 ........... 224,266 276,000 (87,350,253) (381,243) (4,365,839)
Issuance of Series B preferred
stock, net of issuance costs .... -- -- -- -- -- (4,213)
Issuance of common stock ......... -- -- -- -- -- 11,634
Cancelation of note receivable ... -- -- -- -- 103,500 --
Net exercise of warrants in
connection with capital leases. (199,159) (276,000) -- -- -- --
Issuance of warrants in connection
with capital leases, exercisable
at $2.50 per share............... 80,000 -- -- -- -- --
Capital surplus from investment
in subsidiary..................... -- -- 1,789,600 -- -- 1,789,600
Net loss ......................... -- -- -- (11,947,110) -- (11,947,110)
-------- ----------- ------------ ------------- ------------ ------------
Balance at June 30, 1995 ........... 105,107 -- 1,789,600 (99,297,363) (277,743) (14,515,928)
Issuance of common stock ......... -- -- -- -- -- 1,096
Issuance of warrants in
connection with bank line of
credit........................... -- -- -- -- -- --
Expiration of warrants in
connection with capital leases .. (25,107) -- -- -- -- --
Capital surplus from investment
in subsidiary.................... -- -- 474,108 -- -- 474,108
Net loss ......................... -- -- -- (8,609,087) -- (8,609,087)
-------- ----------- ------------ ------------- ------------ ------------
Balance at June 30, 1996 ........... 80,000 $ -- $ 2,263,708 $(107,906,450) $ (277,743) $(22,649,811)
======== =========== ============ ============= ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 26
CENSTOR CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .......................................... $ (7,736,233) $(11,947,110) $(8,609,087)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................. 1,292,507 1,594,956 1,456,658
Gain (loss) on sale of fixed assets ............ 24,005 (2,156) (145,908)
Interest on subordinated and secured
convertible debentures ....................... 1,352,818 774,016 816,856
Loss applicable to minority interest ........... -- (81,650) (194,642)
Changes in assets and liabilities:
Receivables .................................. 28,737 (3,113) 13,009
Prepaid expenses and other current assets .... 29,298 (148,175) 211,051
Accounts payable ............................. (1,532,004) 112,320 271,778
Accrued payroll and related expenses ......... 133,694 (40,346) (205,173)
Accrued interest ............................. (254,794) -- --
Deferred revenue:
Related party ............................... (1,756,053) -- --
Other ....................................... (4,738,989) 1,475,840 (2,062,498)
Other current liabilities .................... (40,958) (15,853) 319,942
------------ ------------ -----------
(5,461,739) 3,665,839 481,073
------------ ------------ -----------
Net cash used in operating activities ............. (13,197,972) (8,281,271) (8,128,014)
INVESTING ACTIVITIES
Additions to property and equipment ............... (1,745,363) (378,731) (191,668)
Proceeds from sale and leaseback
and sale of fixed assets ........................ 2,766,635 583,751 550,050
------------ ------------ -----------
Net cash provided by (used in) investing activities 1,021,272 205,020 358,382
FINANCING ACTIVITIES
Proceeds from issuance of short- and
long-term debt .................................. 459,515 -- --
Proceeds from short-term borrowings ............... -- -- 1,000,000
Proceeds from notes payable ....................... -- -- 6,450,000
Proceeds from sale of preferred stock of subsidiary -- 2,000,000 540,000
Purchase of certificate of deposit in
connection with leases .......................... -- (94,450) --
Principal payments under capital leases ........... (919,971) (1,081,029) (1,390,357)
Repayment of shareholders' note receivable ........ 4,125 -- --
Net proceeds from sale of capital stock ........... 18,109,991 7,421 1,096
------------ ------------ -----------
Net cash provided by financing activities ......... 17,653,660 831,942 6,600,739
------------ ------------ -----------
Net increase (decrease) in cash and cash .......... 5,476,960 (7,244,309) (1,168,893)
equivalents
Cash and cash equivalents at beginning of year .... 3,136,240 8,613,200 1,368,891
------------ ------------ -----------
Cash and cash equivalents at end of year .......... $ 8,613,200 $ 1,368,891 $ 199,998
============ ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 27
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company licenses technology related to recording heads and storage
media utilizing contact magnetic recording technology. The Company licenses its
technology to disk drive and component manufacturers. In June 1995, the Company
formed a new subsidiary, Contact Recording Technology, Inc. (CRT), to develop
and manufacture contact longitudinal data storage heads for the computer disk
drive industry. The Company received an approximate 89.5% interest in the
subsidiary in exchange for agreements to license certain technology and to
provide certain services to the subsidiary. The remaining 10.5% interest was
sold to two outside investors for $2,000,000.
In September 1995, a potential third outside investor/joint venture
partner was issued a warrant to purchase 250,000 shares of preferred stock of
CRT at an exercise price of $4.00 per share, exercisable through December 31,
1995. The investor exercised the warrant to purchase a total of 135,000 shares
for a total of $540,000 for an approximate equity interest of 2.7%.
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, CRT, and its wholly owned subsidiary, Censtor Media Corp. (Media),
an inactive research and development company.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company invests
excess cash in money market funds with a local bank and a large, well-rated
financial institution. These investments are generally available upon demand and
are collateralized by the assets of the bank and the financial institution.
F-6
<PAGE> 28
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Financial Instruments
Carrying amounts and fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------
1996 1995
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Cash and cash
equivalents ...... $ 199,998 $ 199,998 $ 1,368,891 $1,368,891
Borrowings:
Short-term
borrowings .... $ 1,000,000 $1,000,000 $ -- $ --
Promissory note to
potential
licensee ........ $ 3,000,000 N/A $ -- $ --
Notes payable .... $ 3,450,000 $3,450,000 $ -- $ --
Subordinated
debentures ...... $14,488,311 N/A $13,671,455 N/A
</TABLE>
The fair values for cash and cash equivalents represent the quoted market
prices at the balance sheet dates. Fair values for the short-term borrowings and
notes payable approximate their carrying amounts since interest rates on the
borrowings are adjusted periodically to reflect market interest rates. Fair
value for the promissory note to the potential licensee is not provided as it
was exchanged for a license on August 12, 1996 (see Note 3). Fair value for the
subordinated debentures is not provided as approximately $12,488,300 (plus
subsequent accrued interest to September 30, 1996) is expected to be forgiven on
September 30, 1996. The remaining $2,000,000 was paid on July 18, 1996 (see Note
3).
F-7
<PAGE> 29
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Revenue Recognition
License fees are generally recognized over the estimated period in which
the Company expects to provide support in connection with the license.
Royalties from licensees on sales of licensed products will be recognized
when products incorporating the Company's technology are shipped by the
licensees or when nonrefundable payments are received (see Note 2).
Property and Equipment
Property and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of five years. Assets under
capital leases and leasehold improvements are amortized on a straight-line basis
over the lease term or their estimated useful lives, if shorter.
Property and equipment under capital lease obligations have a capitalized
value and net book value of $3,527,828 and $1,887,579 at June 30, 1995 and
$3,444,789 and $814,886 at June 30, 1996. Amortization expense on assets under
capital lease obligations is included in depreciation and amortization.
Long-Lived Assets
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121). FAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. FAS 121 is effective for the fiscal years beginning after December 15,
1995. The adoption of FAS 121 is not expected to have a material impact on the
Company's financial position or results of operations.
F-8
<PAGE> 30
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accounting for Employee Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123). The Company will be required to adopt FAS 123 in 1996. The Company's
intention is to continue to account for employee stock options in accordance
with APB Opinion No. 25 and to adopt the "disclosure only" alternative described
in FAS 123.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Share
Net loss per share is computed based on the weighted average number of
shares of the Company's common stock. The Company's common stock equivalent
shares from convertible preferred stock and from stock options and warrants were
antidilutive for each of the three years ended June 30, 1994, 1995, and 1996
and, accordingly, were not included in the weighted average number of shares.
Major Licensees
In fiscal 1996, one licensee comprised 34% of revenues. In fiscal 1995 and
1996, a second licensee comprised 82% and 64% of revenues, respectively. In
fiscal 1994 and 1995, a third licensee comprised 13% and 10% of revenues,
respectively. In 1994, a fourth licensee (a related party) comprised 22% of
revenues, a fifth licensee comprised 12% of revenues, and a sixth licensee
comprised 53% of revenues.
F-9
<PAGE> 31
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SALE OF ASSETS
On March 29, 1996, the Company entered into an agreement (the Agreement)
with an established component manufacturer in the disk drive industry (the
acquirer), which provided for the transfer to the acquirer of the Company's
research and development operations, including substantially all of the
Company's employees and the sale of certain of the Company's physical assets and
rights and obligations under contracts related thereto on the closing date of
the Agreement. The Agreement was approved by the Company's shareholders on July
11, 1996 and closed on July 18, 1996. Upon the closing, the Company granted to
the acquirer a nonexclusive, irrevocable worldwide license covering the
Company's intellectual property, including the Company's rights in patents,
technology, and software.
Gross proceeds to the Company under the Agreement are $9,025,000, subject
to certain adjustments under the Agreement, of which $6,525,000 was payable upon
closing with the balance receivable in installments from November 15, 1996
through April 18, 1997, subject to certain conditions. The gross proceeds were
reduced by approximately $1,900,000, related to partial repayment of the
outstanding balance on notes payable to the acquirer. The remaining balance on
the notes payable of approximately $450,000 was forgiven.
Of the total proceeds, $8,000,000 was in consideration for the grant of
the license and $1,025,000 for the sale of assets and transfer of the assembled
workforce.
The Company will recognize a gain of approximately $700,000 in connection
with the sale of assets and the transfer of the assembled workforce in fiscal
1997.
Of the net proceeds, the Company used $3,603,759 to pay down obligations
due as of the closing date, including $2,000,000 to partially repay outstanding
accrued interest on the subordinated debentures (see Note 3), $597,787,
including accrued interest of $51,112 to partially repay the convertible
promissory notes (see Note 3), and $1,005,972, including accrued interest of
$5,972 to repay the Company's line of credit (see Note 3). The remainder of the
proceeds will be used for general working capital purposes with respect to the
Company's ongoing licensing operations.
F-10
<PAGE> 32
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Without a research and development department to provide ongoing
technological assistance and support to its licensees, all remaining deferred
revenue related to nonrefundable license fees (and any related withholding tax)
was recognized upon the transfer of the employees to the acquirer.
The Company has granted the acquirer a security interest in its
intellectual property to secure certain obligations and warranties with respect
to the intellectual property for a period of six years following the effective
date of the Agreement. After the third year following the effective date of the
Agreement, the Company may terminate the security interest by depositing
$4,000,000 in an escrow account. Such amount is reduced by $1,000,000 in each of
the two succeeding years, and the escrow terminates the following year.
Management believes that all of the license fee may not be realized due to
amounts that will have to be paid out of the escrow fund or amounts that will
have to be paid prior to the establishment of the escrow. Accordingly, the
Company plans to recognize $4,000,000 of the license fee ratably over the first
three years following the closing of the Agreement, which approximates the time
period during which the Company expects to be incurring costs to maintain its
patents in support of the license agreement. Subsequently, amounts will be
recognized as the escrow fund described above is reduced.
3. DEBT
Obligations Under Capital Leases
On July 18, 1996, in connection with the sale of assets to a component
manufacturer in the disk drive industry, all obligations under capital leases
were transferred to such manufacturer.
Short-Term Borrowings
At June 30, 1996, the Company had a line of credit with its primary bank
to provide short-term working capital of up to $1,000,000. The line of credit
bears a variable interest rate of prime plus 2.5% and is collateralized by the
assets of the Company. On July 18, 1996, the balance outstanding of $1,000,000
was repaid upon the closing of the Agreement.
F-11
<PAGE> 33
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Other notes payable consisted of the following at June 30, 1996:
<TABLE>
<S> <C>
Promissory note issued to potential licensee, due
August 23, 1996 and converted to a license
August 12, 1996 ..................................... $3,000,000
Convertible promissory notes issued to existing
investors, bearing interest at prime plus 2.5%,
due nine months after the closing, collateralized
by assets of the Company, convertible into shares
of the next equity security issued by Censtor ....... $1,000,000
Promissory notes issued to component manufacturer
in disk drive industry in connection with the sale of
assets, bearing interest at 10% per annum,
(see Note 2) ........................................ $2,450,000
</TABLE>
On July 8, 1996, the Company received an additional $350,000 from a
promissory note issued to the acquirer. On July 18, 1996, the promissory notes
issued to the acquirer were partially offset against proceeds from the sale of
assets, with the remainder being forgiven (see Note 2). In addition, $597,787,
including accrued interest of $51,112, of the convertible promissory notes
issued to existing investors was repaid.
Subordinated Debentures
The Company's subordinated debentures at June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Convertible subordinated debentures due
August 24, 1997, convertible at $26.55 of
principal and accrued interest per share . $ 5,000,000 $ 5,000,000
Accrued interest at 6% per year ............ 1,733,817 2,137,846
Subordinated debentures due January 17, 1998 5,000,000 5,000,000
Accrued interest at 6% per year ............ 1,937,638 2,350,465
----------- -----------
$13,671,455 $14,488,311
=========== ===========
</TABLE>
F-12
<PAGE> 34
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On February 22, 1996, the subordinated debentures were modified such that
the Company was obligated to pay $2,000,000 against the outstanding accrued
interest by July 31, 1996. On July 18, 1996, upon closing the Agreement, this
amount was paid. Furthermore, if certain financial conditions are not met, the
debenture holder will forgive the remaining accrued interest and principal
balance on September 30, 1996, in return for 5% of the royalties the Company may
receive from its present and future licenses through the year 2001. The Company
does not anticipate meeting these conditions and therefore expects to recognize
a gain of approximately $12,700,000 in fiscal 1997 in connection with the
anticipated forgiveness of the accrued interest and principal.
Cross Default Provisions
The above subordinated debentures include certain cross default provisions
that provide for the debentures to be immediately due and payable if the Company
was to be declared in default with any of its other creditors.
4. COMMITMENTS
In connection with the Agreement, the Company transferred its principal
facility to the acquirer who assumed the remaining lease payments. At that time,
the Company entered into a lease which expires in April 1999 for a smaller
office facility. A schedule of future minimum lease payments as of June 30, 1996
under the new lease agreement is as follows:
<TABLE>
<S> <C>
1997............................................... $ 51,024
1998............................................... 51,024
1999............................................... 42,520
--------
Total minimum lease payments....................... $144,568
========
</TABLE>
Rental expense for 1994, 1995, and 1996 was approximately $929,000,
$709,000, and $468,000, respectively.
F-13
<PAGE> 35
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. COMMON AND CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock
The preferred stock is divided into Series A and B preferred stock as follows:
<TABLE>
<CAPTION>
SHARES
------------------------
ISSUED AND
AUTHORIZED OUTSTANDING TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Series A ... 7,500,000 6,617,299 $14,055,143
Series B ... 14,000,000 8,370,508 18,453,888
Undesignated 3,500,000 -- --
---------- ----------- -----------
25,000,000 14,987,807 $32,509,031
========== =========== ===========
</TABLE>
The holders of Series A and B preferred stock are entitled to
noncumulative dividends, as declared by the Board of Directors out of legally
available funds, at a rate of $0.2124 and $0.25 per share, per annum,
respectively. After payment of the dividend preferences and payment to the
holders of common stock of noncumulative dividends, as declared by the Board of
Directors out of legally available funds, at a rate of $0.10 per share, per
annum, the preferred stock shall participate, as if converted on a
share-for-share basis with common stock, as to any dividends paid by the
Company. Such dividends are noncumulative.
Series A and B preferred stock are convertible at any time after the date
of issuance into common stock on a one-for-one basis, subject to adjustment for
certain subsequent dilutive stock issuances. In addition, the Series A and B
preferred stock will automatically convert into common stock upon the closing of
an underwritten public offering of the Company's common stock at not less than
$4.00 per share, which results in gross proceeds of not less than $10,000,000,
or in the event of an affirmative vote of the holders of at least 51% of Series
A and B preferred stock, respectively.
F-14
<PAGE> 36
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Upon liquidation, the Series B preferred shareholders are entitled to
receive an amount equal to $2.50 per share plus the aggregate amount of any
declared but unpaid dividends, after which the Series A preferred shareholders
are entitled to receive an amount equal to $2.124 per share plus the aggregate
amount of any declared but unpaid dividends. After the distributions above have
been made, remaining amounts shall be distributed among the holders of Series A
and B preferred stock and common stock pro rata, based on the number of shares
of common stock held by each shareholder, assuming conversion of all preferred
stock. Preferred shareholders participate in the voting rights of the Company as
if their shares were converted to common stock.
Warrants to Purchase Preferred Stock
At June 30, 1996, certain of the Company's lessors held warrants to
purchase 301,318 shares of the Company's Series B preferred stock, exercisable
at $2.50 per share through the later of September 2003 or five years after the
closing of a public offering of the Company's common stock. The Company
estimated the fair value of these warrants at $150,000. This amount is being
amortized over the life of the lease agreements.
At June 30, 1996, the sales agent in connection with the sale of the
Series B preferred stock held warrants to purchase 687,000 shares of Series B
preferred stock, exercisable at $2.50 per share and expiring on March 23, 1998.
The warrants are convertible into warrants to purchase shares of common stock.
The Company estimated the fair value of these warrants to be approximately
$103,000.
At June 30, 1996, the Company's primary bank held warrants to purchase
approximately 110,000 shares of the Company's preferred stock at the lower of
$2.50 or the share price of the next security issued by the Company, exercisable
from November 2000 through February 2001, respectively.
Warrants to Purchase Common Stock
At June 30, 1996, one of the Company's lessors held warrants to purchase
80,000 shares of the Company's common stock, exercisable at $2.50 per share
through the later of January 2005 or five years after the closing of a public
offering of the Company's common stock.
F-15
<PAGE> 37
1990 Stock Option Plan
Outstanding options are granted at fair market value and generally expire
ten years after the date of grant. The exercise provisions of the option grants
are determined by the Board of Directors and are generally exercisable over a
48-month period beginning six months after issuance.
The following table summarizes option activity for the plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -----------------------------------------------
AVAILABLE OPTION PRICE AGGREGATE
FOR GRANT SHARES PER SHARE VALUE
---------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 124,086 968,646 $0.2921 - $6.372 $ 762,703
Authorized ........... 621,468 -- $ -- --
Granted .............. (1,647,992) 1,647,992 $0.40 - $1.062 959,249
Exercised ............ -- (41,185) $0.2921 - $1.062 (16,484)
Canceled ............. 1,082,496 (1,082,496) $0.2921 - $6.372 (1,139,447)
---------- ---------- -----------
Balance at June 30, 1994 180,058 1,492,957 $0.2921 - $0.40 566,021
Authorized ........... 1,500,000 -- $ -- --
Granted .............. (1,475,340) 1,475,340 $0.40 590,136
Exercised ............ -- (35,055) $0.2921 - $0.40 (11,634)
Canceled ............. 333,105 (333,105) $0.2921 - $1.062 (123,758)
---------- ---------- -----------
Balance at June 30, 1995 537,823 2,600,137 $0.2921 - $0.40 1,020,765
Granted .............. (422,500) 422,500 $0.40 169,000
Exercised ............ -- (2,875) $0.2921 - $0.40 (1,096)
Canceled ............. 1,546,354 (1,546,354) $0.2921 - $0.40 (600,952)
---------- ---------- -----------
Balance at June 30, 1996 1,661,677 1,473,408 $0.2921 - $0.40 $ 587,717
========== ========== ===========
</TABLE>
There were 620,791, 920,991, and 769,398 options exercisable at June 30,
1994, 1995, and 1996, respectively.
Stock Reserved for Future Issuance
Shares of preferred and common stock reserved for future issuance are
1,098,318 shares and 19,460,055 shares, respectively, at June 30, 1996.
F-16
<PAGE> 38
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INCOME TAXES
Income tax expense for fiscal 1995 and 1996 consists of foreign
withholding taxes on license revenue.
Significant components of the Company's deferred tax assets for federal
and state income taxes are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 33,852,000 $ 35,203,000
Tax credit carryforwards ....... 3,094,000 4,221,000
Other .......................... 3,132,000 2,115,000
------------ ------------
Total deferred tax assets ........ 40,078,000 41,539,000
Valuation allowance .............. (40,078,000) (41,539,000)
------------ ------------
Net deferred tax assets .......... $ -- $ --
============ ============
</TABLE>
The change in the valuation allowance was a net increase of $1,461,000 and
$3,898,000 for fiscal 1995 and 1994, respectively. Income tax expense reconciles
to loss before income tax expense multiplied by the statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate ... $(2,630,000) $(3,991,000) $(2,885,000)
Unbenefited tax losses .. 2,630,000 3,991,000 2,885,000
Foreign withholding taxes
under license agreement -- 290,350 319,450
----------- ----------- -----------
Income tax expense ...... $ -- $ 290,350 $ 319,450
=========== =========== ===========
</TABLE>
As of June 30, 1996, the Company had federal net operating loss and credit
carryforwards of approximately $98,000,000 and $3,300,000, respectively,
expiring in various years beginning in 1997 through 2010. The Company also has
state net operating loss and credit carryforwards of approximately $31,000,000
and $1,200,000, respectively. The state operating loss carryforwards will expire
in various years beginning in 1997 through 2001, while the credit carryforwards
will expire in various years beginning in 2003 through 2011.
F-17
<PAGE> 39
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Tax law provides that the use of net operating loss and credit
carryforwards are limited if there is a substantial change in the ownership of
the Company. Due to prior years' equity transactions, such a change has
occurred. Approximately $75,000,000 of federal net operating loss and all credit
carryforwards are subject to an annual limitation. The annual limitation is
approximately $1,200,000 per year. The balance of $22,000,000 federal net
operating loss carryforwards can be used without limitation.
Similar limitations apply to state carryforwards.
CRT has a federal net operating loss carryforward of approximately
$7,529,000.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Payments for interest costs and significant noncash investing and
financing activities, not disclosed elsewhere, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1994 1995 1996
----------- -------- -------
<S> <C> <C> <C>
Interest paid .................. $ 558,000 $282,484 $67,958
Equipment purchased under
capital leases ............... $ 2,962,788 $687,588 $24,851
Conversion of secured
convertible debentures to
Series A preferred stock ..... $14,055,143 $ -- $ --
Conversion of bridge loans to
Series B preferred stock ..... $ 460,799 $ -- $ --
Issuance of common stock in
exchange for promissory note . $ 8,810 $ -- $ --
Cancelation of note receivable . $ -- $103,500 $ --
</TABLE>
F-18
<PAGE> 40
EXHIBIT INDEX
---------------
<TABLE>
Exhibit
Number Description
- ------- ------------
<S> <C>
10.4 (1) (2) License Agreement, dated September 23, 1991, between the
Company and Maxtor Corporation, as amended.
10.5 (1) (2) License Agreement, dated February 28, 1991, between the
Company and Fujitsu Limited, as amended.
10.6 (1) (2) Manufacturing License Agreement, dated August 26, 1988,
between the Company and Denki Kagaku Kogyo Kabushiki Kaisha,
as amended.
10.7 (1) (2) License Agreement, dated June 1, 1993, between the Company
and International Business Machines Incorporated.
10.8 (1) Denka Promissory Note.
10.9 (3) License Agreement, dated December 19, 1994, between Hitachi,
Ltd. and the Company.
10.10 (5) License Agreement, dated June 19, 1995, between Contact
Recording Technology, Inc. and the Company.
10.11 (2)(5) License Agreement, dated August 7, 1995, between NEC
Corporation and the Company.
10.12 (6) Agreement for Purchase and Sale of Assets by and between
Read-Rite Corporation and the Company.
10.13 (2) License Agreement, dated August 12,1996, between Western
Digital and the Company.
10.14 Assignment of Lease and Consent to Assignment, dated
July 2, 1996, between The Sobrato Group, Censtor Corp. and
Read-Rite Corp.
10.15 Fifth Amendment to Manufacturing License Agreement, dated
February 22, 1996, with Denki Kagaku Kogyo Kabushiki
Kaisha.
10.16 Amendment to Terms of Debentures, dated February 22, 1996,
with Denki Kagaku Kogyo Kabushiki Kaisha.
10.17 License Agreement, dated July 18, 1996 between Read-Rite
Corporation and the Company.
24 Power of Attorney (see signature page)
27 Financial Data Schedule
</TABLE>
- --------------------
(1) Incorporated by reference to exhibits filed with a Registrant's
Registration Statement on Form 10 which became effective
December 25, 1994.
(2) Confidential Treatment requested for portions of Exhibit.
(3) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994.
(4) Document indicated is a compensatory plan.
(5) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K, as amended, for the year ended
June 30, 1995.
(6) Incorporated by reference to exhibit filed with Registrant's Proxy
Statement relating to the Registrant's 1996 Annual Meeting of
Shareholders.
<PAGE> 1
EXHIBIT 10.13
LICENSE AGREEMENT
This Agreement is entered into this 12th of August, 1996 ("Effective
Date"), by and between Censtor Corp., a California corporation, with principal
offices at 2105 Hamilton Avenue, Suite 270, San Jose, California 95125
("Censtor"), and Western Digital Corporation, a Delaware corporation, with
principal offices at 8105 Irvine Center Drive, Irvine, CA 92719 ("Licensee").
BACKGROUND
A. Censtor has developed and is continuing to develop designs and
manufacturing processes for data systems and has obtained and is obtaining
certain patents relating thereto.
B. Censtor has entered into a Manufacturing License Agreement with
Denka Kagaku Kogyo Kabushiki Kaisha ("Denka") under which Denka has provided to
Censtor the right, under certain conditions, to grant sublicenses to patents
owned by Denka.
C. Censtor has granted and is granting patent licenses to several
companies to manufacture and sell products. Licensee desires to obtain such a
license from Censtor and Censtor desires to grant such a license to Licensee on
the terms and conditions set forth below.
NOW, THEREFORE, in consideration of their respective promises
and agreements set forth herein, Censtor and Licensee agree as follows:
AGREEMENT
1. DEFINITIONS
1.1 Affiliated Entities. "Affiliated Entities" shall mean Licensee
and all Subsidiaries of Western Digital Corporation.
1.2 Censtor Patents. "Censtor Patents" shall mean all patents and
patent claims in all countries of the world, including utility models and
design patents, issued or issuing on patent applications entitled to an
effective filing date on or before December 31, 1999 which are or hereafter
become (a) owned by Censtor, (b) licensed by Censtor from Denka or (c) licensed
to Censtor from others with the right to grant sublicenses of the scope granted
herein (without requiring the payment of additional compensation). Within ten
(10) days after the Effective Date, Censtor shall provide Licensee with a list
of Censtor Patents filed or issued on or before the Effective Date. Censtor
will provide Licensee annually with a list of the patents filed after the
Effective Date and, from time to time upon Licensee's reasonable written
request, will update such list during the term of this Agreement.
1.3 Censtor-Type Head. "Censtor Type Head" shall mean a head device
which is covered by a claim in a Censtor Patent and which also meets the
following description: a head structure that provides both a transducer and a
working surface, with the working
1
<PAGE> 2
surface defining a plane, with the transducer having a loop of magnetic
material extending further in a direction parallel than perpendicular to the
plane, which device is unlike a flying head or a head which is designed to
react to airflow dynamics to ensure a nominal head-disk physical spacing during
operation; provided, however, that any head device which first becomes
available in significant commercial quantities after December 31, 2004 shall
not be considered a Censtor-Type Head.
1.4 Confidential Information. "Confidential Information" has the
meaning set forth in Section 5.1 below.
1.5 HSA. "HSA" shall mean the assembled componentry commonly referred
to in the disk drive industry as a head stack assembly, including head gimbal
assemblies, arms, flex circuits and other related components.
1.6 HSA Cost. "HSA Cost" shall mean the purchase or manufacturing
cost to Licensee or its Affiliated Entity of an HSA.
1.7 Improvements. "Improvements" shall mean improvements,
enhancements, reconfigurations and new models which are derived from or based
on one or more Censtor Patents.
1.8 Licensee Improvement Patents. "Licensee Improvement Patents"
shall mean all patents and patent claims in all countries of the world,
including utility models and design patents, issued or issuing on patent
applications entitled to an effective filing date after the Effective Date but
prior to termination of this Agreement which cover Improvements and under which
Licensee or any of its Affiliated Entities has or obtains the right to grant
licenses within the scope hereof (without requiring the payment of additional
compensation). "Licensee Improvement Patents" shall not include those
Improvements with respect to which ownership is allocated solely to Licensee
and/or one or more of its Affiliated Entities under any separate agreement or
agreements between Censtor and Licensee and/or one or more of its Affiliated
Entities.
1.9 Royalty Bearing Product. "Royalty Bearing Product" shall mean any
product which (a) constitutes or comprises a disk drive or other data storage
device and (b) is covered by a claim in a then issued Censtor Patent.
1.10 Subsidiary. "Subsidiary" shall mean a corporation or other entity
of which fifty percent (50%) or more of the voting stock or other equity
interests is owned, directly or indirectly, by either party, but such
corporation or other entity shall be deemed to be its Subsidiary only so long
as such ownership exists.
2. LICENSE TO LICENSEE
2.1 Grant. Subject to the terms and conditions of this Agreement,
Censtor hereby grants to Licensee a worldwide, non-exclusive, non-transferable
(except as described in Section 9.4 hereof) license, without the right to grant
sublicenses except as set forth in Section 2.2 below, under Censtor Patents to
manufacture, have manufactured, import, use,
2
<PAGE> 3
lease, sell and otherwise transfer disk drives and other products and processes
having data storage applications.
2.2 Sublicense Rights. Licensee shall have the right to grant sublicenses
of the rights granted in Section 2.1 above only to its Affiliated Entities;
provided that (i) Licensee shall cause each such sublicensed Affiliated Entity
to agree to be bound by the terms and conditions of this Agreement and (ii) such
sublicense will terminate upon termination of this Agreement for any reason.
Licensee hereby guarantees the performance by each such sublicensed Affiliated
Entity of all applicable obligations contained herein.
2.3 Trademarks. Licensee and its Affiliated Entities may in their
discretion use, free of charge on its products and product package, the marking
or markings used by Censtor from time to time in connection with products
covered by Censtor Patents ("Trademarks"), on catalogues, brochures and/or other
documentation relating to products offered for sale by Licensee or any of its
Affiliated Entities utilizing any Censtor Patents. A current list of Trademarks
is attached as Exhibit A hereto. If Licensee or any of its Affiliated Entities
elects to use the Trademarks, they shall use the Trademarks in accordance with
the instructions from Censtor and agree that Censtor may from time to time
revise these instructions. All representations of Censtor's Trademarks so used
shall be exact duplicates of those used by Censtor or shall first be submitted
to Censtor for approval of design, color, and other details.
2.4 Limitations.
(a) No license or other right is granted, by implication, estoppel or
otherwise, to Licensee, under any Censtor Patents or other proprietary rights
now or hereafter owned or controlled by Censtor except for the licenses and
rights expressly granted in this Agreement.
(b) The scope of the license granted to Licensee under Section 2.1
does not include the right to manufacture and distribute or authorize customers
to use or distribute heads as separate components not incorporated in disk
drives or other data storage products, except as necessary for repair or spare
parts purposes in support of products previously sold, leased or otherwise
transferred by Licensee or any of its Affiliated Entities, and except that
Licensee and its Affiliated Entities may, to the extent not inconsistent with
Censtor's contractual obligations to its current licensees, liquidate excess
inventory through sales of heads to any Censtor licensee under its license from
Censtor or through sales of heads to others (provided that, in the case of such
sales of heads to others, the heads sold will be deemed to be Royalty Bearing
Products if covered by a then issued Censtor Patent and the royalty due on
account of such sales will be determined by the provisions of Section 4.2
hereof).
(c) The scope of the license granted to Licensee under Section 2.1
does not include the right to sell, lease or otherwise transfer media to
unaffiliated customers as separate components not incorporated in disk drives or
other data storage products, except as necessary for repair or spare parts
purposes in support of products previously sold, leased or otherwise
transferred, and except that Licensee and its Affiliated Entities may sell,
lease or
3
<PAGE> 4
transfer media to unaffiliated customers who are Censtor licensees and to others
to the extent not inconsistent with Censtor's contractual obligations to its
current licensees.
(d) The provisions of this Section 2.4 are intended solely as limits
on the scope of the license granted under Section 2.1 hereof and shall not
operate or be construed as covenants under this Agreement. Consequently, any
assertion by Censtor that Licensee or any of its Affiliated Entities is
operating beyond the limits set forth in Section 2.4(b) or (c) hereof must be
made as a patent infringement claim independent of this Agreement and will not
be a breach of this Agreement regardless of the outcome of such claim.
2.5 Purchase of Components from CRT. Censtor shall promptly authorize
Contact Recordings Technology, Inc. and its successors and permitted assigns
("CRT"), its manufacturing licensee, to sell heads, head gimbal assemblies and
HSAs covered by Censtor Patents to or for Licensee and one or more of Licensee's
designated Affiliated Entities. Censtor shall not revoke such authorization
during the term of this Agreement.
3. LICENSES FROM LICENSEE
3.1 License to Censtor. Licensee hereby grants to Censtor a paid-up,
royalty-free, worldwide, non-exclusive, non-transferable (except as described in
Section 9.4 below) license under the Licensee Improvement Patents to
manufacture, have manufactured, import, use, lease, sell and otherwise transfer
any product or process that has data storage applications and which is covered
by one or more claims in the Licensee Improvement Patents.
3.2 Sublicense Rights. Censtor shall have the right to grant sublicenses
of the rights granted in Section 3.1 above only to CRT and Denka.
4. LICENSE FEE AND ROYALTIES
4.1 License Fee. As an initial, non-refundable license fee, Licensee
hereby assigns to Censtor without recourse all of Licensee's interest in that
certain Convertible Promissory Note in the principal amount of ********** made
by CRT dated September 25, 1995, as amended (originally issued to a subsidiary
of Licensee and subsequently assigned to Licensee).
4.2 Royalties.
(a) Censtor shall be entitled to the following royalties (without
duplication) on the sale, lease or other transfer for value of each Royalty
Bearing Product by Licensee and its Affiliated Entities to an unaffiliated
customer.
(i) if the Royalty Bearing Product contains only Censtor-Type
Heads, the royalty shall be equal to **************** of the amount by
which the HSA Cost of a comparably performing HSA which does not use
Censtor-Type Heads exceeds the actual HSA Cost of the Royalty Bearing
Product, provided that if such excess is (A) less than *********** per
head, the royalty shall be *********** per head for each Censtor-Type
Head in the Royalty Bearing Product, or
*Omitted and filed separately with the
SEC pursuant to a confidential
treatment request.
4
<PAGE> 5
(B) more than *********** per head, then the royalty shall be
********** per head for each Censtor-Type Head in the Royalty Bearing
Product;
(ii) If the Royalty Bearing Product contains one or more heads
which are covered by a then issued Censtor Patent but does not contain
any Censtor-Type Heads, the royalty shall be *********** per head for
each head in the Royalty Bearing Product which is covered by a then
issued Censtor Patent, provided that no royalty shall accrue or be
payable in respect of any such sale, lease or other transfer for value
which occurs on or before December 31, 1997;
(iii) if the Royalty Bearing Product contains both (A) a
Censtor-Type Head and (B) a head which is not a Censtor-Type Head but is
covered by a then issued Censtor Patent, then the royalty shall be
calculated on a per head basis with Section 4(a)(i) hereof applying to
the Censtor-Type Heads in such Royalty Bearing Product and Section
4(a)(ii) hereof (including the moratorium contained therein) applying to
the heads which are not Censtor-Type Heads but which are covered by a
then issued Censtor Patent (provided such combined royalty shall not
exceed maximum royalty which would have been payable if all heads in
such Royalty Bearing Product which are covered by a then issued Censtor
Patent were Censtor-Type Heads); and
(iv) if the Royalty Bearing Product does not contain a head
covered by a then issued Censtor Patent (but is nevertheless a Royalty
Bearing Product), Censtor and Licensee shall negotiate in good faith a
reasonable royalty not to exceed the royalty that would be payable under
Section 4.2(a)(ii) above and subject to the moratorium contained
therein;
provided, however, that no royalties shall accrue or be payable in respect of
Royalty Bearing Products which contain heads purchased by Licensee or one or
more of its Affiliated Entities (or their designated assembly vendor) from CRT
and provided further that no royalties shall accrue or be payable in respect of
Royalty Bearing Products on account of the inclusion therein of components
procured by Licensee or one or more of its Affiliated Entities (or their
designated assembly vendor) from Read-Rite Corporation, its successors and
assigns ("RRC") to the extent Censtor has licensed RRC to manufacture, have
manufactured, import, use and sell such components.
(b) Upon payment by Licensee and its Affiliated Entities of an
aggregate of ********* in royalties attributable to Censtor-Type Heads in
Royalty Bearing Products, the royalty obligation attributable to Censtor-Type
Heads in Royalty Bearing Products shall cease.
(c) Upon payment by Licensee and its Affiliated Entities of an
aggregate of ********* in royalties pursuant to Section 4.2(a)(ii), 4.2(a)(iii)
(insofar as it relates to heads which are not Censtor-Type Heads) and 4.2(a)(iv)
hereof, the royalty obligation attributable to sales of such Royalty Bearing
Products shall cease.
*Omitted and filed separately with the
SEC pursuant to a confidential
treatment request.
5
<PAGE> 6
(d) The ******** maximum aggregate royalty payable in respect of sales
of Royalty Bearing Products which contain Censtor-Type Heads shall be reduced to
********, and the royalty obligation payable in respect of Royalty Bearing
Products which contain Non-Censtor-Type Heads will be eliminated, upon the
occurrence of either of the following events (without placing any obligation on
Licensee to accomplish either event): (i) Licensee is the first customer to
purchase ******** heads from CRT or (ii) Licensee has loaned CRT or Censtor more
than ******** by April 1, 1996 with repayment terms providing for repayment of
the loan without interest by way of a discount equal to or corresponding to
**************** per head gimbal assembly purchased from CRT by Licensee and its
Affiliated Entities.
(e) The maximum royalty provisions of Section 4.2(b) and (c), as
adjusted by Section 4.2(d), if and when applicable, do not apply to the sale,
lease or transfer for value of a Royalty Bearing Product which is covered by a
Censtor Patent that issues on a patent application entitled to an effective
filing date on or after October 1, 1995 which differs from the prior art on the
basis of (i) the structure of a Censtor-Type Head which includes a
magnetoresistive element or (ii) any other major new development by Censtor in
(x) the structure of a magnetoresistive head or (y) some other type of
component or technology not currently used by Licensee or any of its Affiliated
Entities in disk drives. In such event, Censtor shall, upon request by Licensee
at any time thereafter, negotiate in good faith such reasonable additional
terms (including without limitation royalty rate and maximum aggregate royalty)
as are reasonably necessary to prevent Licensee from operating at a competitive
disadvantage attributable to the royalty obligations of this Agreement.
(f) Notwithstanding anything in this Agreement to the contrary,
Censtor expressly acknowledges and agrees that Licensee shall at all times have
the right to challenge the validity, enforceability and asserted scope of any
Censtor Patent, and Licensee's royalty obligations are applicable only to
products which are covered by valid and enforceable patent rights.
(g) Censtor hereby releases and discharges Licensee and its Affiliated
Entities from any liability for infringement of any Censtor Patents or other
intellectual property rights of Censtor with respect to sales of products by
Licensee or any of its Affiliated Entities occurring prior to the Effective
Date.
4.3 Payments and Accounting.
(a) Records and Audits. With respect to the number of Royalty Bearing
Products sold, leased or otherwise transferred for value by Licensee and its
Affiliated Entities and the royalties payable under the provisions of Section
4.2, Licensee shall keep complete and accurate records. These records shall be
retained for a period of three (3) years from the date of payment,
notwithstanding the expiration or other termination of this Agreement. Censtor
shall have the right to examine and audit, through an independent accounting
firm, acceptable to Licensee, not more than once a year, and during normal
business hours, all such records and such other records and accounts as may
contain, under recognized accounting practices, information bearing upon the
amount of royalties payable to Censtor under this
*Omitted and filed separately with the
SEC pursuant to a confidential
treatment request.
6
<PAGE> 7
Agreement. Prompt adjustment shall be made by Licensee to compensate for any
errors and/or omissions disclosed by such examination or audit which result in
an underpayment of royalties hereunder. Should the amount of any such error
and/or omission exceed of five percent (5%) of the total royalties due for the
period under audit, then upon request by Censtor, Licensee shall pay for the
reasonable cost of the audit.
(b) Reports and Payment Terms. Within forty-five (45) days
after the end of each of the first three fiscal quarters of Licensee and within
ninety (90) days after the end of each of its fiscal years, until all royalties
payable hereunder shall have been reported and paid, Licensee shall furnish to
Censtor a statement in suitable form showing all Royalty Bearing Products sold
by Licensee and its Affiliated Entities during such quarter and the amount of
royalty payable thereon. If no products subject to royalty have been sold, that
fact shall be shown on such statement. Also, within such thirty (30) day period
Licensee shall pay to Censtor the royalties payable under Section 4.2 for such
quarter. All royalty and other payments to Censtor hereunder shall be in United
States dollars.
5. CONFIDENTIAL INFORMATION
5. Definition. As used in this agreement, the term "Confidential
Information" shall mean any information disclosed pursuant to this Agreement by
one party to the other during the term of this Agreement which is in written,
graphic, machine readable or other tangible form and is marked "Confidential,"
"Proprietary" or in some other manner to indicate its confidential nature.
Confidential Information may also include oral information disclosed by one
party to the other in the course of the performance of this Agreement, provided
that such information is designated as confidential at the time of disclosure
and reduced to a written summary by the disclosing party, within thirty (30)
days after its oral disclosure, which is marked in a manner to indicate its
confidential nature and delivered to the receiving party. As used herein,
"Confidential Information" may include, without limitation, the know-how,
inventions, prototypes, materials, processes, process equipment, designs,
specifications, and certain technical data, business and financial data, product
information, patent applications, and documents relating to the development,
manufacturing, testing, and marketing of products disclosed by either party to
the other directly in writing or by drawings or inspection of parts or
equipment.
5.2 Nondisclosure. Each party shall treat as strictly confidential
all Confidential Information of the other party, shall implement reasonable
procedures to prohibit the disclosure, unauthorized duplication, misuse or
removal of the other party's Confidential Information and shall not disclose
such Confidential Information to any third party except as may be necessary and
required in connection with the rights and obligations of such other party
under this Agreement, and subject to confidentiality obligations at least as
protective as those set forth herein. Without limiting the foregoing, each of
the parties shall use at least the same procedures and degree of care which it
uses to prevent the disclosure of its own confidential information of like
importance to prevent the disclosure of Confidential Information disclosed to
it by the other party under this Agreement.
7
<PAGE> 8
5.3 Exceptions. Notwithstanding the above, neither party shall have
liability to the other with regard to any Confidential Information of the other
which:
(a) was generally known and available in the public domain
at the time it was disclosed or becomes generally known and available in the
public domain through no fault of the receiver;
(b) was known to the receiver without restriction at the
time of disclosure as shown by the files of the receiver in existence at the
time of disclosure and was not acquired directly or indirectly from a third
party under obligation of confidentiality to the disclosing party;
(c) is disclosed with the prior written approval of the
disclosure;
(d) was independently developed by the receiver without any
use of the Confidential Information, provided that the receiver can demonstrate
such independent development by documented evidence prepared contemporaneously
with such independent development;
(e) becomes known to the receiver without restriction from
a source other than the discloser without breach of this Agreement by the
receiver and otherwise not in violation of the discloser's rights; or
(f) is disclosed pursuant to the order or requirement of a
court, administrative agency, or other governmental body; provided, that the
receiver shall provide prompt, advance notice thereof to enable the discloser
to seek a protective order or otherwise prevent such disclosure.
5.4 Binding Other Parties. Each party shall obtain the execution of
proprietary nondisclosure agreements with its subsidiaries, employees, agents
and consultants having access to Confidential Information of the other party,
and shall diligently enforce such agreements, and shall exercise due care to
control the actions of such subsidiaries, employees, agents and consultants in
this respect so long as they have a working relationship with the party.
5.5 Rights Under Breach. Each party acknowledges that the other
party's Confidential Information is an extremely valuable business asset, the
misuse or improper disclosure of which would cause irreparable harm to the
interest of such party. Accordingly, if either party breaches any of its
obligations under this Section the other party shall be entitled to equitable
relief to protect its interest therein, including but not limited to injunctive
relief, as well as money damages. In addition, the parties agree upon request
to cooperate in efforts seeking to enjoin the subsequent wrongful disclosure of
Confidential Information by third parties to whom such information was
disclosed by a receiving party hereunder.
8
<PAGE> 9
6. INTELLECTUAL PROPERTY OWNERSHIP
6.1 Censtor Ownership. During the term of this Agreement, Censtor
warrants that it either (a) owns all right, title and interest in or (b) has
the right to license to Licensee the Censtor Patents. Licensee acknowledges
that Censtor has made no representation to Licensee with respect to patent
prosecution efforts other than to maintain until July 31, 1997 a patent
prosecution effort sufficient to maximize the value of Censtor's patent
portfolio which is consistent, in Censtor's good faith judgment, with good
business practices.
6.2 Licensee Ownership. Licensee shall be free to develop
Improvements and Licensee shall own, subject to Section 3, all right, title and
interest in such Improvements. To the extent such Improvements embody Censtor
Patents, Licensee shall have no license to use such Improvements except
according to the terms of this Agreement.
7. LIMITATION OF LIABILITY
CENSTOR'S LIABILITY ARISING OUT OF THIS AGREEMENT SHALL NOT EXCEED THE
AMOUNTS RECEIVED FROM LICENSEE HEREUNDER. IN NO EVENT SHALL CENSTOR BE LIABLE
FOR COST OF PROCUREMENT OF SUBSTITUTE PRODUCTS, SERVICES, OR TECHNOLOGY NOR
SHALL EITHER PARTY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT,
PUNITIVE, EXEMPLARY OR SPECIAL DAMAGES HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY ARISING OUT OF THIS AGREEMENT. THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
8. TERM AND TERMINATION
8.1 Term. This Agreement shall commence as of the Effective Date and
shall continue for fifteen (15) years or until the expiration of the last to
expire Censtor Patent, whichever occurs later.
8.2 Termination.
(a) If either party defaults in the performance of any material
obligation hereunder and if such default is not corrected within thirty (30)
days after the defaulting party receives written notice thereof from the
non-defaulting party, then the non-defaulting party, at its option, may, in
addition to any other remedies it may have, terminate this Agreement.
(b) Either party may terminate this Agreement effective upon
written notice to the other party in the event that the other party becomes the
subject of a voluntary or involuntary petition in bankruptcy or any proceeding
relating to insolvency, or composition for the benefit of creditors, if that
petition or proceeding is not dismissed within sixty (60) days after filing.
9
<PAGE> 10
8.3 Effect of Termination.
(a) Except as otherwise expressly stated herein, upon any
termination or expiration of this Agreement, all licenses and rights granted by
the parties to each other hereunder shall terminate, and neither Licensee nor
any of its Affiliated Entities shall have any rights with respect to any
Censtor Patents. The provisions of Sections 5, 7, 8, and 9 shall survive any
termination or expiration of this Agreement for any reason. The provisions of
Section 3.2 shall survive any termination of this Agreement but shall not
include any Licensee Improvement Patent which issues after the effective date
of such termination (regardless of effective filing date to which such Licensee
Improvement Patent may be entitled). In addition, all amounts for which payment
is due to Censtor prior to the date of termination shall remain due and payable.
(b) Licensee and its Affiliated Entities shall have the right to
provide continuing maintenance support for previously sold products after any
termination or expiration of this Agreement.
9. GENERAL PROVISIONS
9.1 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the United States and the State of
California without reference to conflict of laws principles.
9.2 Settlement of Disputes. The parties hereto shall use their best
endeavors to settle by mutual agreement any disputes, controversies or
differences which may arise from, under, out of or in connection with this
Agreement. If such disputes, controversies or differences cannot be settled
between the parties, they shall be finally resolved by binding arbitration in
Orange County, California, under the Commercial Rules of Arbitration of the
American Arbitration Association by a single arbitrator appointed in accordance
with said rules. The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflicts of law or
arbitration. Judgment on the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. Notwithstanding the foregoing, the
parties may apply to any court of competent jurisdiction for temporary,
preliminary, or final injunctive or other equitable relief without breach of
this arbitration provision.
9.3 Announcement. Licensee and Censtor shall announce the existence
of their relationship and this Agreement at a time and with form and substance
to be mutually determined, neither party to unreasonably withhold its consent
to such mutually determined announcement.
9.4 Assignment. Neither party may assign or delegate this Agreement
or any of its rights or duties under this Agreement without the prior written
consent of the other except either party may assign this Agreement to a
Subsidiary, person, or entity into which it has merged or which has otherwise
succeeded to all or substantially all of its business and assets relating to the
subject matter of this Agreement, and which has assumed in writing or by
10
<PAGE> 1
EXHIBIT 10.14
ASSIGNMENT OF LEASE
AND CONSENT TO ASSIGNMENT
THIS ASSIGNMENT OF LEASE AND CONSENT TO ASSIGNMENT (this "Assignment")
is made and entered into effective as of this 2nd day of July, 1996, by and
among The Sobrato Group, a California Limited Partnership ("Landlord"), whose
address is 10600 N. De Anza Blvd., Suite 200, Cupertino, CA 95014, Censtor
Corporation, a California corporation ("Assignor"), whose address is 2105
Hamilton Avenue, Suite 270, San Jose, CA 95125, and Read-Rite Corporation, a
Delaware Corporation ("Assignee"), whose address is 345 Los Coches Street,
Milpitas, CA 95035, who agree as follows.
1. Recitals. This Assignment is made with reference to the following
facts and objectives:
a. Landlord and Assignor, as tenant, entered into a written Lease
dated November 28, 1983 ("the Lease"), in which Landlord leased to Assignor
and Assignor leased from Landlord premises located in the City of San Jose,
County of Santa Clara, California, as more particularly described in the Lease
("Premises"). A copy of the Lease and all amendments thereto is attached
hereto as Exhibit "A" and incorporated herein by this reference.
b. Assignor now desires to assign all its right, title, and interest
in the Lease to Assignee.
c. Landlord shall consent to the proposed assignment on the
conditions set forth in this Assignment.
2. Effective date of assignment: The assignment of the Lease shall take
effect on July 2, 1996, and Assignor shall give possession of the Premises to
Assignee on that date.
3. Assignment and assumption: Assignor assigns and transfers to
Assignee all its right, title, and interest in the Lease, and Assignee accepts
the assignment and assigns and agrees to perform, as a direct obligation to
Landlord, all the obligations of "Lessee" under the Lease arising under the
Lease from and after the effective date of this Assignment.
<PAGE> 2
4. Landlord's consent: Landlord consents to the assignment without
waiver of the restriction concerning further assignment.
5. Tenant Improvements: Neither Landlord nor Assignor has agreed to
perform or install any tenant improvements for the benefit of Assignee.
6. Assignor's liability: Assignor shall remain liable for the
performance of the provisions of the Lease.
7. Assignor's and Landlord's Estoppel: Assignor and Landlord hereby
certify to the best of their knowledge the following facts:
a. The copy of the Lease attached as Exhibit "A" is a true and
complete copy of the Lease, including all modifications and amendments thereto.
b. The term of the Lease commenced on June 1, 1984 and will expire
on July 31, 1998. The Lease contains one three-year option to extend the term
which has not been exercised and which is subject to all other terms and
conditions of Section 28 of the Lease.
c. The base rent under the Lease is $37,836.60 per month through
July 31, 1996; $39,828.00 per month from August 1, 1996 through July 31, 1997;
and $41,819.40 per month from August 1, 1997 through July 31, 1998. Assignor is
current in its payment obligation respecting rent and any other required
payments.
d. Neither Landlord nor Assignor is in default under any provision
of the Lease, nor is there any condition which, through the passage of time or
otherwise, would constitute a default under the Lease.
e. Assignor and Landlord acknowledge that Assignee may rely upon the
representations contained in this Section 7 in entering into and accepting
assignment of the Lease.
8. Assignee to hold Assignor harmless: If Assignee defaults under the
Lease, Assignee shall indemnify and hold Assignor harmless from all damages
resulting from the default. If Assignee defaults in its obligations under the
Lease and Assignor pays rent to Landlord or fulfills any of Assignee's other
obligations in order to prevent Assignee from being in default, Assignee
immediately shall reimburse Assignor for the amount of rent or costs incurred
by
<PAGE> 3
Assignor in fulfilling Assignee's obligations under this Assignment, together
with interest on those sums at the rate of 10% per annum. Notwithstanding the
foregoing, however, Assignee shall have no liability to Assignor with respect
to any defaults or other matters under the Lease which are attributable to acts
or omissions of Assignee prior to the effective date of the Assignment.
9. Default of Lease: Notice to Assignor:
a. Notice to Assignor: Landlord will send to Assignor any notice of
default that Landlord sends to Assignee.
b. Assignor's remedies against Assignee. If Assignee defaults under
the Lease, Assignor shall have all rights against Assignee that are available
by law and those contained in the Lease, including, without limitation,
Assignor's right to reenter and retake possession of the Premises from Assignee.
10. Security deposit: The parties acknowledge that Landlord now holds
the sum of thirty-six thousand, eight hundred and forty-one dollars
($36,841.00) as a security deposit, to be applied subject to the provisions of
the Lease. Assignor releases all claims to that sum, and the sum shall be held
by Landlord for the benefit of Assignee, subject to the provisions of the Lease.
11. Amendment of Lease: Landlord and Assignee shall not enter into any
agreement that amends the Lease without Assignor's consent. Any amendment of
the Lease in violation of this provisions shall have no force or effect on
Assignor.
12. Miscellaneous
a. Attorneys' fees. If any party commences an action against any of
the parties arising out of or in connection with this Assignment, the
prevailing party or parties shall be entitled to recover from the losing party
or parties reasonable attorneys' fees and costs of suit.
b. Notice. Any notice, demand, request, consent, approval, or
communication that any party desires or is required to give to the other
parties or any other person shall be in writing and either served personally or
sent by prepaid, first-class mail. Any notice, demand, request, consent,
approval, or communication that any party desires or is required to give to the
other parties shall be addressed to the other parties at the addresses set
forth in the introductory
<PAGE> 4
paragraph of this Assignment. Any party may change its address by notifying the
other parties of the change of address. Notice shall be deemed communicated
within three (3) days from the time of mailing if mailed as provided in this
paragraph.
c. Successors. This Assignment shall be binding on and inure to the
benefit of the parties and their successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
effective as of the date first set forth above.
LESSOR: ASSIGNOR:
The Sobrato Group Censtor Corporation
By: /s/ J.M. Sobrato By: /s/ R. M. Krapf
------------------------- --------------------------
Title: General Partner Title: President, CEO
---------------------- --------------------
ASSIGNEE:
Read-Rite Corporation
By: /s/ Rex S. Jackson
-------------------------
Rex S. Jackson
Title: Vice President & General Counsel
----------------------------------
<PAGE> 1
EXHIBIT 10.15
FIFTH AMENDMENT TO
MANUFACTURING LICENSE AGREEMENT
This Fifth Amendment to the Manufacturing License Agreement dated
as of February 22, 1996 (this "Amendment"), is entered into by and among
Censtor Corp. and Censtor Media Corp. (collectively, "Censtor") and Denki
Kagaku Kogyo Kabushiki Kaisha ("Denka"). This Amendment is made to the
Manufacturing License Agreement dated August 26, 1988 (the "MLA"), by and
between Censtor and Denka, as amended on December 19, 1990, as further
amended on May 17, 1990, as further amended on August 23, 1991, and as
further amended on July 27, 1993 (the MLA and all amendments thereto
collectively, the "License Agreement"). All capitalized terms defined in
the MLA and the various amendments and used herein without
definition shall have the respective meanings assigned to such terms (whether
directly or indirectly by reference) in the MLA and the various amendments.
RECITALS
WHEREAS, pursuant to the terms of the License Agreement, Censtor
agreed to pay to Denka an amount equal to one percent (1%) of the running
royalties Censtor received from its non-Denka licensees on their revenues
of certain disk drives (the "Royalty Obligation");
WHEREAS, Censtor Corp. and Denka have entered into an Amendment to
Terms of Debenture dated as of the date hereof (the "Debenture Amendment");
WHEREAS, pursuant to the terms of the Debenture Amendment, Denka will
reduce the aggregate outstanding principal under certain debentures issued by
Censtor Corp. in favor of Denka by the amount of $10,000,000;
WHEREAS, in consideration for the execution and delivery of the
Debenture Amendment, Censtor has agreed to amend the License Agreement such
that Censtor's Royalty Obligation is increased from one percent (1%) to five
percent (5%), such increase effective until December 31, 2001;
WHEREAS, pursuant to a letter dated April 7, 1995, addressed to
Dr. Garret A. Garrettson, President and CEO of Censtor, Denka agreed to waive
certain provisions of the License Agreement as such provisions applied to
the supply of magnetic head components;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree to the above Recitals and as follows:
1. Paragraph 2.2a(i). Paragraph 2.2.(a)(i) of the License Agreement
shall be deleted in its entirety and the following paragraph shall be
substituted therefor:
<PAGE> 2
(i) If Censtor provides (by sale or otherwise) Contact
Recording Products (excluding magnetic head components) to any person who is
not a Censtor licensee or a subcontractor of a Censtor licensee, except that
Censtor may provide Contact Recording Products (excluding magnetic head
components) to potential licensees of Censtor in connection with Censtor's
promotion or sale of license rights for the Contact Recording Products
(excluding magnetic head components); or
2. Paragraph 2.2a(ii). Paragraph 2.2.(a)(ii) of the License Agreement
shall be amended by inserting after the phrase "Contact Recording Products"
the phrase "(excluding magnetic head components)".
3. Paragraph 2.10. Paragraph 2.10 of the License Agreement shall be
amended by inserting after the phrase "Contact Recording Products" the phrase
"(excluding magnetic head components)".
4. Paragraph 6.2. The first sentence of Paragraph 6.2 of the License
Agreement shall be amended by deleting "one percent (1%)" and substituting
"five percent (5%)" therefor.
5. Paragraph 6.3. Paragraph 6.3 of the License Agreement shall be
amended by inserting after the phrase "an amount equal to" in line 5 of
Paragraph 6.3 the phrase "five (5) times". Paragraph 6.3 shall be further
amended by deleting the sentence after "Example of formula:" and substituting
the following sentence therefor:
If a license fee of $5,000,000 was paid to Censtor for a license
bearing a running royalty rate of 1.5% and then Censtor granted a license which
had a license fee of $15,000,000 and a running royalty rate of 0.5%, then
Censtor would pay Denka $250,000 [5 x [(1%-0.5%) x (15,000,000 - 5,000,000)]].
6. Addition of Paragraph 6.6. Article 6 of the License Agreement shall
be further amended by adding the following paragraph after Paragraph 6.5
thereof:
6.6 Term of Obligations. Censtor's obligations to make payments to
Denka under Paragraphs 6.2, 6.3 and 6.5 hereof shall terminate on December 31,
2001.
7. Term of Amendment. Notwithstanding any other provision of this
Amendment, the date of effect of this Amendment shall be September 30, 1996,
8. Continued Effect. Unless expressly amended hereby, the License
Agreement shall remain in full force and effect.
8. Amendments. This Amendment may not be amended or waived except by a
written instrument signed by both parties, and any such amendment or waiver
shall be effective only for the specific purpose given.
2
<PAGE> 3
9. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each party hereto and its successors and assigns.
10. Entire Agreement. This Amendment, together with the Licensing
Agreement, express the entire understanding of the parties with respect to the
transactions contemplated hereby and by the Licensing Agreement.
11. Severability. The provisions of this Amendment are several and if
any one provision hereof shall be held invalid or unenforceable in whole or in
part in any jurisdiction, such invalidity or unenforceability shall affect only
such provision in such jurisdiction.
12. Captions. Captions in this Amendment are included for convenience
of reference only and shall not constitute a part of this Amendment for any
other purpose.
13. Counterparts. This Amendment may be executed in several
counterparts, each of which shall be an original, with the same effect as if
the signatures were upon the same, and all of which shall constitute one
agreement. In proving this Amendment, it shall not be necessary to produce more
than one such counterpart executed by the party to be charged.
14. Governing Law. This Amendment shall be governed in all respects by
and construed and enforced in accordance with the internal laws of the State of
California, without reference to conflict of laws.
15. JURISDICTION: WAIVER OF JURY TRIAL. THE PARTIES AGREE THAT ANY SUIT
FOR THE ENFORCEMENT OF THIS AMENDMENT OR THE LICENSE AGREEMENT BE BROUGHT IN
THE COURTS OF THE STATE OF CALIFORNIA OR ANY FEDERAL COURT SITTING THEREIN. THE
PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO
ANY ACTION ARISING IN CONNECTION WITH THIS AGREEMENT.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
CENSTOR CORP
By: /s/ Garrett Garrettson
---------------------------
Title: President & CEO
---------------------------
CENSTOR MEDIA CORP.
By: /s/ Garrett Garrettson
---------------------------
Title: President & CEO
---------------------------
DENKI KAGAKU KOGYO KABUSHIKI
By: /s/ Tsuneo Yano
---------------------------
Title: President
---------------------------
4
<PAGE> 1
EXHIBIT 10.16
AMENDMENT TO TERMS OF DEBENTURES
This Amendment to Terms of Debentures (this "Amendment") dated as of
February 22, 1996, is entered into by and between Censtor Corp. ("Censtor")
and Denki Kagaku Kogyo Kabushiki Kaisha ("Denka").
Reference is made to the Subordinated Debenture Purchase Agreement dated
August 24, 1988, by and between Censtor and Denka (the "Purchase Agreement"),
as amended on October 13, 1992 (the "Debenture Amendment"); the Common Stock
Convertible Subordinated Debenture dated August 24, 1988, executed by Censtor
in favor of Denka, as amended by the Debenture Amendment (the "Convertible
Debenture"); the Subordinated Debenture dated January 17, 1989, executed by
Censtor in favor of Denka, as amended by the Debenture Amendment (the
"Subordinated Debenture", and together with the Convertible Debenture, the
"Debentures"); the Manufacturing License Agreement dated August 26, 1988
(the "MLA"), by and between Censtor and Denka, as amended on December 19,
1990, as further amended on May 17, 1990, as further amended on August 23,
1991, and as further amended on July 27, 1993 (the MLA and all amendments
thereto collectively, the "License Agreement"); and the Security Agreement
dated January 17, 1989, by and between Censtor and Denka (the "Security
Agreement"). The Purchase Agreement, the Debenture Amendment, the Debentures,
the License Agreement and the Security Agreement are collectively referred
to herein as the "Debenture Documents".
All capitalized terms defined in the Purchase Agreement, as amended
by the Debenture Amendment, and the MLA and the various amendments thereof
and used herein without definition shall have the respective meanings assigned
to such terms (whether directly or indirectly by reference) in the Purchase
Amendment, as amended, and the MLA and the various amendments.
RECITALS
WHEREAS, pursuant to the terms of the Purchase Agreement, Censtor
agreed to issue and sell, and Denka agreed to purchase, the Convertible
Debenture and the Subordinated Debenture, each in the aggregate principal
amount of $5,000,000;
WHEREAS, pursuant to the terms of the Purchase Agreement, Censtor
issued the Convertible Debenture on August 24, 1988, and the Subordinated
Debenture on January 17, 1989;
WHEREAS, pursuant to the terms of the Convertible Debenture, as
amended by the Debenture Amendment, Censtor agreed to pay to the order of
Denka (i) the principal amount of $5,000,000, convertible into shares of
Censtor's common stock at $5.00 per share, and the accrued interest thereon
for the first three years after the date of issuance of such Debenture,
on August 24, 1997, and (ii) annual installments of accrued interest
commencing after the third year of the date of issuance of such Debenture;
WHEREAS, pursuant to the terms of the Subordinated Debenture, as
amended by the Debenture Amendment, Censtor agreed to pay to the order of
Denka (i), the principal amount of $5,000,000 and the accrued interest
thereon for the first three years after the date of issuance of such
<PAGE> 2
Debenture on January 17, 1998, and (ii) annual installments of accrued interest
commencing after the third year of the date of issuance of such Debenture;
WHEREAS, pursuant to the terms of the Security Agreement, Censtor
granted Denka a security interest in certain of its assets as security for its
payment obligations under the Subordinated Debenture;
WHEREAS, pursuant to the terms of the License Agreement, Censtor agreed
to pay to the order of Denka an amount equal to one percent (1%) of the running
royalties Censtor received from its non-Denka licensees on their revenues of
certain disk drives (the "Royalty Obligation");
WHEREAS, in consideration for the execution and delivery of this
Amendment, Censtor has agreed to amend the License Agreement such that, among
other things, Censtor's Royalty Obligation is increased from one percent (1%)
to five percent (5%), such increase effective until December 31, 2001;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained in this Amendment and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree to the above Recitals and as follows:
1. Mandatory Payment of Accrued Interest Due Under Debentures. The
Debentures are hereby amended such that Censtor shall be obligated to pay to
the order of Denka the amount of $2,000,000 as soon as possible from the date
hereof, but in no event later than July 30, 1996, which amount shall be
credited against outstanding accrued interest due on the principal amount of
the Debentures. Censtor's failure to meet its payment obligations under this
Paragraph 1 shall automatically invalidate any and all terms of this Amendment,
and Censtor's obligations shall be governed by the applicable Debenture
Documents as in effect on July 30, 1996.
2. Principal and Accrued Interest Due Under Debentures. If on September
30, 1996, Censtor has a cash balance equal to at least 18 months of monthly
operating expenses or $3,000,000, as evidenced by its financial statements,
then Censtor agrees to use its best efforts consistent with good business
practices to pay to the order of Denka on such date all remaining outstanding
principal and accrued interest thereon. Notwithstanding the actual amount of
principal and accrued interest paid to Denka on September 30, 1996, the
Debentures are further amended such that all other accrued interest due
thereunder as of September 30, 1996 shall be forgiven by Denka.
3. Reduction to Principal Owing Under Debentures. In consideration of
the execution and delivery by Censtor of the Fifth Amendment to Manufacturing
Licensing Agreement as of the date hereof and subject to Paragraph 2 above,
Denka agrees that on September 30, 1996, the aggregate outstanding principal
due under the Debentures shall be reduced by the lesser of $10,000,000 and the
aggregate principal amount of the Debentures outstanding on such date. The
parties shall execute and deliver any documents and instruments that may be
necessary to evidence such reduction.
2
<PAGE> 3
4. Termination of Security Agreement. The Security Agreement
is hereby terminated as of the date of receipt of the amount of $2,000,000
by Denka pursuant to Paragraph 1 hereof and pursuant to Paragraph 2 of the
Security Agreement.
5. Continued Effect. Unless expressly amended hereby, the
Purchase Agreement, the Debenture Amendment, the Convertible Debenture,
the Subordinated Debenture, the Security Agreement and the License Agreement
(except as amended on the date hereof) shall remain in full force and effect.
6. Amendments. This Amendment may not be amended or waived
except by a written instrument signed by both parties, and any such amendment
or waiver shall be effective only for the specific purpose given.
7. Binding Effect. This Amendment shall be binding upon and
inure to the benefit to each party hereto and its successors and assigns.
8. Entire Agreement. This Amendment, together with all Exhibits
and Schedules hereto and the Debenture Documents, express the entire
understanding of the parties with respect to the transactions contemplated
hereby and by the Debenture Documents.
9. Severability. The provisions of this Amendment are several
and if any one provision hereof shall be held invalid or unenforceable in
whole or in part in any jurisdiction, such invalidity or unenforceability
shall affect only such provision in such jurisdiction.
10. Captions. Captions in this Amendment are included for
convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
11. Counterparts. This Amendment hereby may be executed in
several counterparts, each of which shall be an original, with the same
effect as if the signatures were upon the same, and all of which shall
constitute one agreement. In proving this Amendment, it shall not be
necessary to produce more than one such counterpart executed by the party
to be charged.
12. Governing Law. This Amendment shall be governed in all
respects by and construed and enforced in accordance with the internal
laws of the State of California, without reference to conflict of laws.
13. JURISDICTION: WAIVER OF JURY TRIAL. THE PARTIES AGREE
THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AMENDMENT OR ANY OF THE
DEBENTURE DOCUMENTS BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA
OR ANY FEDERAL COURT SITTING THEREIN. THE PARTIES HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION ARISING IN
CONNECTION WITH THIS AMENDMENT.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
CENSTOR CORP.
By: /s/ Garrett Garrettson
----------------------
Title: President & CEO
---------------------
DENKI KAGAKU KOGYO KABUSHIKI
KAISHA
By: /s/ Tsuneo Yano
------------------------
Title: President
---------------------
4
<PAGE> 1
Exhibit 10.17
LICENSE AGREEMENT
THIS License Agreement ("Agreement") is made as of 07/18/96 (the
"Effective Date") by and between Read-Rite Corporation, a Delaware corporation,
located at 345 Los Coches Street, Milpitas, CA 95035 ("RRC"), and Censtor
Corporation, a California corporation, located at 530 Race Street, San Jose, CA
95126 ("Censtor").
BACKGROUND
Censtor has sold certain assets to RRC pursuant to an Agreement for
Purchase and Sale of Assets dated as of March 29, 1996 ("Asset Purchase
Agreement"). This Agreement sets forth the terms under which Censtor will
license its intellectual property rights to RRC in conjunction with the Asset
Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties hereto agree as follows:
1. DEFINITIONS
1.1 "Patents" shall mean any and all rights in and to any and all (i)
patents owned by Censtor as of the Effective Date (ii) patent
applications whenever filed if based on inventions made by Censtor on or
prior to the Effective Date, (iii) patents issuing on such patent
applications, and (iv) patents licensed by Censtor from a third party
licensor as of the Effective Date which Censtor has a right to license
to RRC without additional payments or other obligations to such third
party licensor, including without limitation those patents listed in
Exhibit A hereto, provided that Censtor shall sublicense the patents to
RRC that require such additional payments or obligations to the extent
they may be sublicensed if RRC elects to make such additional payments
or assume such other obligations. This definition of Patents shall
include any foreign counterparts, divisions, substitutions,
re-examinations, continuations, continuations-in-part, reissues, patents
of addition, renewals and extensions of any patents or patent
applications owned by Censtor.
1.2 "Software" shall mean all software (i) owned by Censtor as of the
Effective Date, (ii) developed by Censtor on or prior to the Effective
Date, or (iii) licensed to Censtor from a third party licensor as of
the Effective Date which Censtor has a right to license to RRC without
additional payments or other obligations to such third party licensor,
provided that Censtor shall sublicense the software that requires such
additional payments or obligations to RRC to the extent it may be
sublicensed if RRC elects to make such additional payments or assume
such other obligations. The Software licensed hereunder shall be
provided in source code form, except that if such Software is licensed
by Censtor from a third party and can only be licensed to RRC in binary
code form, such Software shall be provided in binary code form to RRC.
<PAGE> 2
1.3 "Technology" shall mean any and all rights in and to any and all
technology and know-how (i) owned by Censtor as of the Effective Date,
(ii) developed by Censtor on or prior to the Effective Date, or (iii)
licensed to Censtor from a third party licensor as of the Effective Date
which Censtor has a right to license to RRC without additional payments
or other obligations to such third party licensor, provided that Censtor
shall sublicense the technology to RRC that requires such additional
payments or obligations to the extent it may be sublicensed if RRC
elects to make such additional payments or assume such other
obligations. "Technology" shall include without limitation, technical
information, know-how, negative know-how, trade secrets, processes,
procedures, compositions, devices, methods, formulas, protocols,
techniques, designs, drawings, mask works, or data.
1.4 "Intellectual Property Rights" means, collectively, the Patents,
Technology and Software and all current and future worldwide patents,
trade secrets, copyrights, copyright registrations and applications
therefor, moral rights, and all other intellectual property rights and
proprietary rights arising under the Patents, Technology or Software,
whether arising under the laws of the United States or any other state,
country or jurisdiction, excluding any trademarks or servicemarks.
1.5 "Affiliate" shall mean a company that is controlled by,
controlling, or in common control with a party hereto. Control shall
mean that more than fifty percent (50%) of the stock entitled to vote
for the election of directors is directly owned by a party hereto, but
only so long as such ownership exists. An "RRC Affiliate" shall
include, but not be limited to, Read-Rite International.
II. GRANT
2.1 Grant. Censtor grants to RRC a worldwide, perpetual, royalty-free,
fully-paid up, non-exclusive license, including the right to sublicense
to RRC Affiliates, under the Intellectual Property Rights to make, have
made, use, sell, offer for sale, import, export, display, modify, and
distribute any products, create derivative works, practice any method,
process, or procedure, and otherwise exploit the Patents, Technology or
Software. The license granted under this Section 2.1 shall be revocable
solely in the event that RRC fails to make the Final Payment referenced
in the Asset Purchase Agreement on the Final Payment Date defined
therein, net of any amounts withheld as security for claims under
Section 8 thereof. Upon RRC's payment to Censtor of such Final Payment,
the licenses granted hereunder shall become irrevocable, notwithstanding
any withholding by RRC of a portion of such Final Payment pursuant to
Section 8.2 of the Asset Purchase Agreement.
2.2 Delivery. Censtor has delivered to RRC copies of all the Patents,
Technology and Software as of the Effective Date, which copies shall be
the property of RRC.
2.3 Security Interest. 23.1 Grant. RRC hereby retains and Censtor
hereby grants to RRC a security interest in the Intellectual Property
Rights licensed hereunder to RRC to secure Censtor's obligations under
Sections 2.4, 3.1 or 3.2 of this Agreement (the "Secured Obligations")
for the period commencing on the Effective Date and terminating
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on the sixth anniversary of the Effective Date (the "Termination Date"). Censor
agrees to promptly execute documents requested by RRC to perfect and protect
such security interest at the Effective Date.
2.3.2. Termination of Security Interest; Escrow. Censtor may terminate the
security interest created hereunder on the third (3rd) anniversary of the
Effective Date by depositing an amount (the "Escrow Amount") that is the
greater of (i) four million dollars ($4,000,000) or (ii) the full amount of any
claim or claims asserted in writing by RRC against Censtor for breach of any
Secured Obligations (a "Secured Obligation Claim") on or prior to such
anniversary in cash into an escrow account established pursuant to a mutually
agreeable escrow agreement. Said escrow agreement shall provide for a release
of all or a portion of the Escrow Amount to RRC to satisfy claims by RRC
against Censtor hereunder relating to any breach of the Secured Obligations.
Thereafter, Censtor may reduce the Escrow Amount by one million dollars
($1,000,000) on each of the fourth (4th) and fifth (5th) anniversaries of the
Effective Date, respectively, provided, however, that any such reduction shall
not cause the funds remaining in the escrow to be less than the amount of any
Secured Obligation Claim or Claims by RRC outstanding on such anniversaries. If
RRC has an outstanding Secured Obligation Claim at the Termination Date then
(i) if Censtor has not terminated the security interest by depositing the
Escrow Amount, the security interest shall survive until the claims are finally
resolved unless Censtor deposits cash in the full amount of such claim in an
escrow account to secure such claims, or (ii) if Censtor has terminated the
security interest, the escrow shall survive the Termination Date until such
claims are finally resolved.
2.3.3. Senior Security Interest: Subordination. Censtor represents and warrants
that the security interest granted herein is senior to any other security
interest granted in the Patents, Software or Technology. Censtor shall not
grant, issue, or convey security interests to which the security interest
granted herein would be subordinate, except (i) any security interest granted
for money borrowed, provided that the amount borrowed shall not exceed two
million dollars ($2,000,000) at any time, and any such obligation to repay
money shall be a Secured Obligation hereunder, and RRC shall have the option to
repay on Censtor's behalf such borrowings at any time and to add the amount of
such repayments to any amounts due upon exercise of the security interest, and
(ii) RRC acknowledges that Denki Kagaku Kogyo Kabushiki Kaisha ("Denka") holds
a security interest in certain Censtor Patents. To address said security
interest, concurrently herewith Censtor has delivered to Censtor's counsel such
sums as are required to satisfy any obligations of Censtor to Denka necessary
to obtain a release of said security interest (the "Satisfaction Payment"), and
caused to be delivered by Denka to Censtor's counsel a fully executed,
irrevocable release of said security interest (the "Release"). Censtor
covenants that, on or before July 31, 1996, it will cause its counsel to
simultaneously deliver the Satisfaction Payment to Denka, and the Release to
RRC. RRC hereby agrees that the security interest granted hereunder is and will
be subject to (i) any license granted by Censtor in the Intellectual Property
Rights, including licenses granted after the date of this Agreement, and (ii)
any security interest to secure obligations for money borrowed as provided
above, including any such security interest granted after the date of this
Agreement. RRC hereby agrees to promptly execute documents reasonably requested
by
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Censtor to acknowledge release of the security interest at the
Termination Date (or such later date as provided above) and to
acknowledge the subordination of its security interest for money
borrowed granted by Censtor as provided above.
2.4 Most Favored Licensee. If Censtor licenses the Intellectual
Property Rights to any person, firm or corporation under more favorable
terms and conditions than those granted to RRC, it shall provide RRC the
benefit of those terms and conditions effective upon the date of
execution of the more favorable license. For the purposes of determining
whether a license is more favorable than the present Agreement under
this Section 2.4, the parties agree to consider each transaction as a
whole. The parties agree that should Censtor enter into a new components
supply license, it shall deliver to RRC an initial summary of the terms
of such license. RRC shall have fifteen (15) days following receipt of
such summary to elect to retain RRC's existing license per the terms set
forth herein, or to elect on a preliminary basis to accept the terms of
said new license. In the latter event, Censtor shall prepare and submit
for RRC's review a draft license agreement, together with a signed
certificate of an officer of Censtor stating that said license
agreement is the same as the new components supply license in all
material respects. RRC shall thereafter have fifteen (15) additional
days to make its final election to accept or reject said new proposed
license. In addition, Censtor shall not grant rights in the Intellectual
Property Rights to any disk drive manufacturer under terms and
conditions more favorable than those granted by Censtor to Western
Digital Corporation ("WDC") or Maxtor Corporation ("MC"), respectively,
without offering such terms to WDC and MC; provided, however, that
Censtor shall not be required to (i) compare any terms granted to either
WDC or MC to those granted to the other, or (ii) offer license terms to
WDC or MC if at any time following the Effective Date WDC or MC, as the
case may be, ceases to be a licensee of Censtor. If Censtor is required
by this Section to offer license terms to either WDC or MC, Censtor
shall offer such terms pursuant to procedures specified in its licenses
with WDC or MC to the extent such procedures exist and, to the extent
they do not, pursuant to the procedures specified above for offering
license terms to RRC.
2.5 Limitations. No license or other right is granted, by
implication, estoppel or otherwise, to RRC or any other third parties
except for the licenses and rights expressly granted in this Agreement.
III. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION.
3.1 Representations and Warranties. As of the Effective Date of this
Agreement, Censtor represents and warrants that, except as set forth in
Schedule 3.1 hereto, (i) Censtor has the right and authority to enter
into this Agreement and to grant the rights and licenses set forth
herein; (ii) to Censtor's best knowledge the use of the Intellectual
Property Rights in connection with Censtor's business operations in the
ordinary course prior to the Effective Date does not constitute a direct
infringement of the intellectual property rights of any other person,
(iii) Censtor, to its best knowledge is not aware of any express
challenge to, or any facts or circumstances that, on their face,
constitute the basis for a challenge to, the validity, scope,
enforceability, ownership or inventorship of the
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Intellectual Property Rights; (iv) Censtor has not received any notice
or other communication alleging that the manufacture, sale or use of
products incorporating the Patents, Software or Technology infringe the
intellectual property rights of any third party or violate any other
third party rights; (v) Censtor has not granted any rights in the
Patents, Software and Technology to any third party that are
inconsistent with the rights and licenses granted to RRC by this
Agreement, and (vi) Censtor has delivered to RRC all of the Patents,
Technology and Software.
3.2 Covenants. Censtor covenants (i) that it will not grant any
rights in the Patents, Software or Technology to any third party that
conflict with the rights and licenses granted to RRC by this Agreement;
and (ii) that as of the Effective Date of this Agreement there are no
circumstances other than RRC's breach of this Agreement or patent
expiration whereby the rights and licenses granted hereunder would be
materially diminished, or have the effect of materially diminishing
such rights and licenses. RRC may, upon breach of this Section,
exercise its security interests under Section 2.2 above and the right
to seek indemnification under Section 3.4 below.
3.3 RRC Representations and Warranties. As of the Effective Date of
this Agreement, RRC represents and warrants that RRC has the right and
authority to enter into this Agreement.
3.4 Indemnification. As the sole remedy for a material breach of a
party's obligations under this Section 3, each party (as indemnitor)
agrees to defend, indemnify, and hold the other party (as indemnitee),
its Affiliates, shareholders, employees and agents harmless against any
loss, liability, and expense (including reasonable attorneys' fees)
arising from such material breach except in the case of RRC, RRC may
also exercise the remedies provided by Section 7.2. The indemnitor
shall have no obligation to indemnify the indemnitee under this section
unless the indemnitee provides the indemnitor with (i) prompt written
notice of such claim or action, (ii) control and authority over the
defense or settlement of such claim or action, and (iii) proper and
full information and reasonable assistance to defend and/or settle such
claim or action.
3.5 Disclaimer. EXCEPT AS EXPRESSLY WARRANTED IN SECTION 3.1 ABOVE,
(I) CENSTOR'S PATENTS, SOFTWARE, TECHNOLOGY AND INTELLECTUAL PROPERTY
RIGHTS ARE PROVIDED TO RRC "AS IS" WITHOUT WARRANTY OF ANY KIND, (II)
THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF ANY HARDWARE OR
SOFTWARE IS ASSUMED BY THE RECEIVING PARTY; AND (III) CENSTOR DISCLAIMS
ALL WARRANTIES, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO ITS
DELIVERABLES, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF
MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE.
IN NO EVENT SHALL CENSTOR BE LIABLE FOR COST OF PROCUREMENT OF
SUBSTITUTE PRODUCTS, SERVICES, OR TECHNOLOGY. THESE LIMITATIONS SHALL
APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY.
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IV. CONFIDENTIAL INFORMATION
4.1 General. The parties may, from time to time, in connection with
this Agreement, disclose to each other Confidential Information.
"Confidential Information" shall mean any information disclosed in
writing by a party to this Agreement to any of the other parties to this
Agreement, and marked by the disclosing party with the legend
"CONFIDENTIAL" or other similar legend sufficient to identify such
information as confidential proprietary information of the disclosing
party. Confidential Information shall include the terms and conditions
of this Agreement, but either party may disclose the existence and
purpose of this Agreement as recited in the Background section. Neither
party shall use any Confidential Information of the other party except
as expressly authorized under this Agreement, and each party will use
best efforts to prevent the disclosure of the other party's Confidential
Information to third parties; provided that the parties may disclose
Confidential Information, with similar protections in place, to the
extent reasonably necessary to exploit the rights and license granted to
such party hereunder (including the rights to grant and authorize
sublicenses); and provided further that the recipient party's
obligations under this Section 4 shall not apply to Confidential
Information that:
4.1.1 is disclosed orally without express designation as
Confidential Information; provided, however, that the
recipient party's obligations under this Section 4
shall apply to information disclosed orally if such
information is confirmed in writing as "CONFIDENTIAL"
by the disclosing party within thirty (30) days after
disclosure thereof;
4.1.2 is in the recipient party's possession at the time of
disclosure thereof;
4.1.3 is or later becomes part of the public domain through
no fault of the recipient party;
4.1.4 is received from a third party having no obligations of
confidentiality to the disclosing party;
4.1.5 is developed independently by the recipient party without
reliance upon or use of the disclosing party's
Confidential Information; or
4.1.6 is required by law or regulation to be disclosed;
provided, however, that the party subject to such
disclosure requirement has provided written notice to
the other party promptly to enable such other party to
seek a protective order or otherwise prevent disclosure
of such Confidential Information.
The parties agree to terminate on the Effective Date, all prior
confidentiality and nondisclosure agreements between the parties
including the Bilateral Non-Disclosure Agreement dated January 11, 1996;
provided, however, that disclosures of Confidential
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Information made prior to the Effective Date shall continue to be
governed by the terms of the applicable confidentiality or
nondisclosure agreement.
V. PATENTS AND INVENTIONS
5.1 Disclosure of Inventions. Censtor will promptly disclose to RRC
in writing any invention conceived of or reduced to practice by Censtor,
its employees, contractors, or agents, alone or jointly with others, as
of the Effective Date of the Agreement. Censtor shall release its
employees from any confidentiality obligations to the extent such
obligations prohibit the disclosure of Censtor Confidential Information
to RRC; provided, however, that nothing in this Agreement shall require
Censtor, or its employees, contractors, or agents, to disclose
Confidential Information of any third party unless Censtor is authorized
to do so by license or agreement with such third party.
5.2 Applications. Censtor shall file patent applications based on
the Patents and maintain the Patents during the term of this Agreement.
During the term of this Agreement, Censtor shall provide RRC with a
report once per month containing a list of patent applications based on
the patents that Censtor elects to abandon, or Patents for which Censtor
elects not to pay any fee required to maintain such Patent. Censtor
shall consider any request by RRC to file or continue the prosecution of
applications for Patents. If Censtor elects not to file or continue the
prosecution of an application requested by RRC, RRC may request
Censtor's consent to pursue and have assigned to RRC such draft patent
application or patent application, which consent may be withheld only if
Censtor determines that the coverage of such draft patent application or
application is substantially covered by another application that is
being pursued by Censtor. If consent is granted and RRC files or
continues the prosecution application, RRC shall pay for the costs,
including reasonable attorney's fees and related filing and maintenance
costs, and RRC agrees to license Censtor on a world-wide, royalty-free,
fully paid, irrevocable, non-exclusive basis with a right of sublicense
to Patents issuing on such applications, provided Censtor pays one-half
of the legal fees and costs incurred by RRC for such Patents.
VI. INFRINGEMENT
6.1 Notice of Infringement. If RRC learns of any infringement of
Censtor's Intellectual Property Rights, RRC shall so inform Censtor in
writing and shall provide Censtor with reasonable evidence of the
infringement.
6.2 Legal Action. RRC may request that Censtor take legal action
against an alleged infringement of the Intellectual Property Rights. If
Censtor initiates such action at RRC's request, it shall do so at its
sole expense and RRC shall render all reasonable assistance that may be
required by Censtor for such action. RRC shall not make any claim for
damages recovered by Censtor. If Censtor does not initiate the legal
action requested by RRC, RRC may request Censtor to consent to RRC
initiating such action in Censtor's
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name. If Censtor consents to such representation, RRC may initiate such
action at its sole expense and shall be entitled to take all necessary
steps in the name of Censtor. Censtor shall render all reasonable
assistance that may be required by RRC for such action and Censtor shall
not make any claim for damages recovered by RRC.
If Censtor does not consent to RRC commencing such action, then upon the
request of RRC the following representatives of RRC and Censtor shall
meet within ten (10) days after the date of the Censtor decision to
attempt to resolve the matter: the General Counsel of RRC and the
President of Censtor. If the matter has not been resolved within twenty
(20) days of their first meeting, the parties shall attempt in good
faith to resolve the controversy or claim in accordance with the
Mediation Service of the Santa Clara County Bar Association.
6.3 Cooperation. Each party shall cooperate with the other in
litigation proceedings instituted under this Agreement (including
without limitation by joining as a nominal party), but at the expense of
the party by whom suit is brought. The party bringing the suit will
control that litigation, except that the other party may elect to be
represented at its own expense by counsel of its choice. Upon the
request and at the expense of the requesting party, the other party
shall make available at reasonable times and under appropriate
conditions all relevant personnel, records, papers, information,
samples, specimens and other similar materials in its possession.
6.4 Attorneys' Fees. Except as set forth in Section 3
(Indemnification), each party shall bear its own attorney's fees and
costs in connection with any dispute between the parties arising under
this Agreement.
VII. TERM AND REMEDIES
7.1. Term. This Agreement shall be perpetual.
7.2 Remedies for Breach. If Censtor is in material default of any
provision of this Agreement other than the Secured Obligations, and such
material default is not corrected within thirty (30) day of receipt of
written notice of such default from RRC, RRC may pursue its available
remedies in law or equity. If Censtor is in material default of the
Secured Obligations, and such material default is not corrected within
thirty (30) days of receipt of written notice of such material default,
RRC shall first pursue a remedy of monetary damages or injunctive relief
pursuant to Section 3.4. If RRC does not receive full and complete
payment or settlement of a claim based on a material default by Censtor
of a Secured Obligation within thirty (30) days after the date of final
determination of such claim, RRC shall have the right to proceed against
the security interest as provided under Section 2.3, including all
rights of a secured party under the California Uniform Commercial Code,
in addition to any other rights it may have in law or equity.
7.3 Remedies for Insolvency. RRC shall have the right to exercise the
security interest cited under Section 2.3, in addition to any other
rights it may have in law and equity, by
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writing immediately if Censtor (i) voluntarily or involuntarily becomes
the subject of a petition in bankruptcy or of any proceeding relating to
insolvency, receivership, liquidation, or composition for the benefit of
creditors; or (ii) admits in writing its inability to pay its debts as
they become due.
7.4 Survival. The rights and obligations under Sections 2, 3, 4, 5,
6, 8 and 9 shall survive termination of this Agreement.
VIII. LIMITATION ON LIABILITY
UNDER NO CIRCUMSTANCES, OTHER THAN AS PROVIDED FOR IN SECTION 3 ABOVE,
SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOST DATA, LOST
PROFITS, BUSINESS INTERRUPTION OR FOR ANY INDIRECT, INCIDENTAL, SPECIAL,
CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES (EVEN IF THAT PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), INCLUDING WITHOUT
LIMITATION, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS.
NOTWITHSTANDING THE FOREGOING, THE MAXIMUM LIABILITY OF EITHER PARTY TO
THE OTHER FOR DAMAGES, OTHER THAN LIABILITY OF CENSTOR UNDER SECTION 3,
FOR ANY AND ALL CAUSES WHATSOEVER, REGARDLESS OF THE FORM OF ACTION,
WHETHER IN CONTRACT, TORT OR OTHERWISE, SHALL BE LIMITED TO THE PURCHASE
PRICE SET FORTH IN THE ASSET PURCHASE AGREEMENT OF NINE MILLION
TWENTY-FIVE THOUSAND DOLLARS ($9,025,000); THE MAXIMUM LIABILITY OF
CENSTOR UNDER SECTION 3 TO RRC FOR DAMAGES FOR ANY AND ALL CAUSES
WHATSOEVER, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT
OR OTHERWISE, SHALL BE LIMITED TO TEN MILLION DOLLARS ($10,000,000).
IX. GENERAL
9.1. Assignment. This Agreement may not be assigned by Censtor
without the prior written consent of RRC, except to a party that
succeeds to all or substantially all of Censtor's business or assets
relating to this Agreement whether by sale, merger, operation of law or
otherwise; provided that such assignee or transferee promptly agrees in
writing to be bound by the terms and conditions of this Agreement.
9.2 Complete Agreement. This Agreement, the exhibits attached
hereto, and the Asset Purchase Agreement, constitute the entire
understanding and only agreements between the parties with respect to
the subject matter hereof and supersede any and all prior negotiations,
representations, agreements, and understandings, written or oral, that
the parties may have reached with respect to the subject matter hereof.
No provision of this Agreement shall be varied, contradicted or
explained by any oral agreement, course of
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dealing or performance or any other matter not set forth in an agreement
in writing and signed by all parties.
9.3. Force Majeure. In the event either party hereto is prevented from
or delayed in the performance of any of its obligations hereunder by
reason of acts of God, war, strikes, riots, storms, fires, or any other
cause whatsoever beyond the reasonable control of the party, the party
so prevented or delayed shall be excused from the performance of any
such obligation to the extent and during the period of such prevention
or delay. In the event of such an event, the party whose performance is
prevented or delayed shall give prompt notice to the other party of the
occurrence of such event and of removal of such event.
9.4. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be
delivered, sent by telecopy, or mailed first-class postage prepaid,
registered or certified mail, and shall be effective upon receipt by the
addressee, if addressed as follows:
If to RRC: Read-Rite Corporation
345 Los Coches Street
Milpitas, CA 95035-5428
Attention: Rex S. Jackson, V.P. & General Counsel
Telephone: (408) 262-6700
Telecopy: (408) 945-9644
with a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Frances S. Currie, Esq.
Telephone: (415) 493-9300
Telecopy: (415) 493-6811
If to Censtor: Censtor Corporation
530 Race Street
San Jose, CA 95126
Attention: Garry A. Garrettson, President & CEO
Telephone: (408) 298-8400
Telecopy: (408) 288-9910
with a copy to: Heller, Ehrman, White & McAuliffe
525 University Avenue
Palo Alto, California 94301-1900
Attention: Matthew P. Quilter, Esq.
Telephone: (415) 324-7000
Telecopy: (415) 324-0638
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9.5 Governing Law. This Agreement shall be governed by, and construed and
interpreted in accordance with, the laws of the State of California; provided,
however, that all questions with respect to validity of any patents or patent
applications shall be determined in accordance with the laws of the respective
country in which such patents or patent applications shall have been granted or
filed, as applicable.
9.6 Dispute Resolution. The parties shall resolve any disputes arising
under this Agreement utilizing the procedures set forth in Section 8.4 of the
Asset Purchase Agreement, to which this Agreement is attached as Exhibit C.
9.7 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or employee of any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement.
9.8 Bankruptcy Code. All rights and licenses granted under or pursuant to
this Agreement by Censtor to RRC are and shall otherwise be deemed for the
purposes of Section 365(n) of the United States Bankruptcy Code, 11 U.S.C.
Section 101, et seq. (the "Bankruptcy Code"), licenses of rights to
"intellectual property" as defined under Section 101(56) of the Bankruptcy
Code. The parties agree that RRC, as a licensee of such rights and licenses,
shall retain and may fully exercise all of its rights and elections under the
Bankruptcy Code.
9.9 No Waiver. A waiver, express or implied, by either party of any right
under this Agreement or of any failure to perform or breach hereof by the other
party hereto shall not constitute or be deemed to be a waiver of any other
right hereunder or of any other failure to perform or breach hereof by such
other party, whether of a similar or dissimilar nature thereto.
9.10 Headings. Headings included herein are for convenience only, do not
form a part of this Agreement and shall not be used in any way to construe or
interpret this Agreement.
9.11 Severability. If any provision of this Agreement shall be found by a
court of competent jurisdiction to be void, invalid or unenforceable, the same
shall be reformed to comply with applicable law or stricken if not so
reformable, so as not to affect the validity or enforceability of the remainder
of this Agreement, provided that the reformation complies with the intent of
the parties.
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9.12. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this Agreement.
Censtor Corporation ("Censtor") Read-Rite Corporation ("RRC")
By: /s/ R.M. Krapf By: /s/ Rex S. Jackson
---------------------------- ----------------------------
Name: Russell M. Krapf Name: Rex S. Jackson
------------------------- -------------------------
Title: President Title: Vice President and
------------------------ General Counsel
-------------------------
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EXHIBIT A
Patents
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CONFIDENTIAL
CENSTOR PATENTS
ISSUED PATENTS
CNR-341 RECORDING HEAD SLIDER ASSEMBLY
U.S. Pat. No. 4,636,894 Granted Jan. 13, 1987
Inventor Mo Filed March 22, 1984
CNR-34101 European Patent Based On CNR-341
EP Pat. No. 0,155,756 Granted Oct. 24, 1990
CNR-34102 Japanese Patent Based On CNR-341
Jap. Pat. No. 1,696,196 Granted Sept. 28, 1992
CNR-342 SLIDER ASSEMBLY FOR SUPPORTING A MAGNETIC HEAD
U.S. Pat. No. 4,757,402 Granted July 12, 1988
Inventor Mo Filed Oct. 3, 1986
CNR-34201 European Patent Based On CNR-342
EP Pat. No. 0,262,655 Granted Jan. 13, 1994
CNR-343 MAGNETIC HEAD AND MULTI-TRACK TRANSDUCER FOR
PERPENDICULAR RECORDING AND METHOD FOR FABRICATING
U.S. Pat. No. 4,423,450 Granted Dec. 23, 1983
Inventor Hamilton Filed May 6, 1981
CNR-34301 Great Britain Patent Based On CNR-343
GB Pat. No. 2,111,741 Granted April 16, 1986
CNR-34302 European Patent Based On CNR-343
EP Pat. No. 0,077,832 Granted July 1, 1988
CNR-34304 Japanese Patent Based On CNR-343
Jap. Pat. No. 1,822,410 Granted Feb. 10, 1994
<PAGE> 15
CONFIDENTIAL
CENSTOR PATENTS
ISSUED PATENTS CONT'D
- ---------------------
CNR-001 THIN-FILM, CROSS-FIELD, CLOSED-FLUX, ANISOTROPIC
ELECTROMAGNETIC FIELD DEVICE
U.S. Pat. No. 4,751,598 Granted June 14, 1988
Inventor Hamilton Filed Feb. 1, 1985
CNR-304 PLANARIZED READ/WRITE HEAD AND METHOD
U.S. Pat. No. 4,860,139 Granted Aug. 22, 1989
Inventor Hamilton Filed June 19, 1987
CNR-309 INTEGRATED MAGNETIC READ/WRITE
HEAD/FLEXURE/CONDUCTOR STRUCTURE
U.S. Pat. No. 5,041,932 Granted Aug. 20, 1991
Inventor Hamilton Filed Nov. 27, 1989
CNR-30901 Canadian Patent Based On CNR-309
Can. Pat. No. 2,026,871 Granted Aug. 17, 1993
CNR-309A METHOD OF MAKING INTEGRATED MAGNETIC READ/WRITE
HEAD/FLEXURE/CONDUCTOR STRUCTURE
U.S. Pat. No. 5,073,242 Granted Dec. 17, 1991
Inventor Hamilton Filed Dec. 21, 1990
CNR-309B INTEGRATED MAGNETIC READ/WRITE
HEAD/FLEXURE/CONDUCTOR STRUCTURE
U.S. Pat. No. 5,111,351 Granted May 5, 1992
Inventor Hamilton Filed June 5, 1990
CNR-309C METHOD OF MAKING INTEGRATED MAGNETIC READ/WRITE
HEAD/FLEXURE/CONDUCTOR STRUCTURE
U.S. Pat. No. 5,163,218 Granted Nov. 17, 1992
Inventor Hamilton Filed June 11, 1991
<PAGE> 16
CONFIDENTIAL
CENSTOR PATENTS
ISSUED PATENTS CONT'D
CNR-309C1 Canadian Patent Based On CNR-309C
Can. Pat. No. 2,047,563 Granted Aug. 17, 1993
CNR-309D METHOD OF MAKING INTEGRATED MAGNETIC READ/WRITE
HEAD/FLEXURE/CONDUCTOR STRUCTURE
U.S. Pat. No. 5,174,012 Granted Dec. 29, 1992
Inventor Hamilton Filed Dec. 12, 1991
CNR-310 MICRO-BURNISHING FLEX HEAD STRUCTURE
U.S. Pat. No. 5,063,712 Granted Nov. 12, 1991
Inventors Hamilton et al. Filed April 2, 1990
CNR-31001 Canadian Patent Based On CNR-310
Can. Pat. No. 2,026,694 Granted July 26, 1994
CNR-31003 Japanese Patent Based On CNR-310
Jap. Pat. No. 1,945,281 Granted June 23, 1995
CNR-313A UNITARY MICRO-FLEXURE STRUCTURE AND METHOD OF MAKING
SAME
U.S. Pat. No. 5,453,315 Granted Sept. 26, 1995
Inventors Hamilton et al. Filed Dec. 14, 1992
CNR-313CA UNITARY MICRO-FLEXURE STRUCTURE AND METHOD OF MAKING
SAME
U.S. Pat. No. 5,483,025 Granted Jan. 9, 1996
Inventors Hamilton et al. Filed Dec. 14, 1992
CNR-313D UNITARY MICRO-FLEXURE STRUCTURE AND METHOD OF MAKING
SAME
U.S. Pat. No. 5,476,131 Granted Dec. 19, 1995
Inventors Hamilton et al. Filed Dec. 14, 1992
<PAGE> 17
CONFIDENTIAL
CENSTOR PATENTS
ISSUED PATENTS CONT'D
CNR-322 GIMBALED MICRO-HEAD/FLEXURE/CONDUCTOR ASSEMBLY AND
SYSTEM
U.S. Pat. No. 5,490,027 Granted Feb. 6, 1996
Inventors Hamilton et al. Filed Oct. 28, 1991
CNR-324 COMPACT, HIGH-SPEED, ROTARY ACTUATOR AND TRANSDUCER
ASSEMBLY WITH REDUCED MOMENT OF INERTIA AND MASS-
BALANCED STRUCTURAL OVERLAP WITH DRIVE MOTOR AND
ORGANIZING METHOD FOR THE SAME
U.S. Pat. No. 5,396,388 Granted March 7, 1995
Inventor Stanley Brown Filed April 8, 1992
PENDING PATENTS
CNR-321A Rigid disk drive with small effective mass head, gimbal.
Continuation-In-Part of CNR-321, which was filed
Nov. 6, 1991.
CNR-322A Continuation-in-Part of CNR-322. Rigid disk drive with
small effective mass head, gimbal. Recently received
Indication of Allowance of numerous claims and filed
brief responsive amendment designed for quick
Allowance of those claims.
CNR-324A COMPACT, HIGH-SPEED, ROTARY ACTUATOR, AND TRANSDUCER
ASSEMBLY WITH REDUCED MOMENT OF INERTIA AND MASS-
BALANCED STRUCTURAL OVERLAP WITH DRIVE MOTOR AND
ORGANIZING METHOD FOR THE SAME
CNR-329 TRANSDUCER/FLEXURE/CONDUCTOR STRUCTURE FOR
ELECTROMAGNETIC READ/WRITE SYSTEM. Filed Nov. 14, 1994.
CNR-335 CONTACT INTERFACE, SYSTEM AND MEDIUM IN
ELECTROMAGNETIC, READ/WRITE, RIGID RECORDING MEDIA
ENVIRONMENT. Filed March 21, 1995.
<PAGE> 18
CONFIDENTIAL
CENSTOR PATENTS
PENDING PATENTS CONT'D
CNR-345 INTERACTIVE SYSTEM FOR LAPPING TRANSDUCERS.
Filed May 26, 1995.
CNR-348 LOW FRICTION SLIDING HARD DISK DRIVE SYSTEM.
Filed August 15, 1995.
CNR-349 CONTACT PLANAR RING HEAD. Filed September 15, 1995.
CNR-350 RING HEAD SLIDING ON PERPENDICULAR MEDIA.
Filed December 22, 1995.
CNR-347 CONTACT HARD DISK DRIVE SYSTEM HAVING A FLEXURE
ORIENTED ALONG THE DIRECTION OF SLIDING.
Filed March 25, 1996.
<PAGE> 19
SCHEDULE 3.1 TO LICENSE AGREEMENT
BETWEEN CENSTOR CORPORATION AND
READ-RITE CORPORATION, DATED
July 18, 1996
-------------
1. IBM patents with an effective filing date prior to September 1, 1991.
2. Censtor's "best knowledge" under Sections 3.1(ii) and (iii) does not
include a detailed review of the copies of all third party patents
within Censtor's possession.
<PAGE> 20
operation of law its obligations under this Agreement (provided that any such
assignment which imposes a withholding tax or similar burden shall require the
prior written consent of the other party). This Agreement shall be binding upon
and inure to the benefit of the respective successors and permitted assigns of
the parties.
9.5 Authority. Each party represents that all corporate action
necessary for the authorization, execution and delivery of this Agreement by
such party and the performance of its obligations hereunder has been taken.
9.6 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effective when
mailed by registered or certified mail, postage prepaid, or otherwise delivered
by hand, by messenger or by telecommunication, addressed to the addresses first
set forth above or at such other address furnished with a notice in the manner
set forth herein. Such notices shall be deemed to have been served when
delivered or, if delivery is not accomplished by reason of some fault of the
addressee, when tendered.
9.7 Force Majeure. Neither party shall be liable to the other for
failure or delay in the performance of any obligations under this Agreement for
the time of and to the extent such failure or delay is caused by riots, civil
commotion, wars or hostilities between nations, governmental laws, orders, or
regulations, embargoes, actions by the government or any agency thereof, acts
of God, earthquakes, storms, fires, accidents, strikes, sabotages, explosives,
or other similar or different contingencies beyond the reasonable control of
the parties.
9.8 Partial Invalidity. If any provision in this Agreement is held to
be invalid or unenforceable in any jurisdiction in which this Agreement is
being performed, the remainder of this Agreement shall be valid and enforceable
and the parties shall negotiate, in good faith, a substitute, valid and
enforceable provision which most nearly effects the parties' intent in entering
into this Agrement.
9.9 Counterparts. This Agreement may be executed in two (2)
counterparts all of which, taken together, shall be regarded as one and the
same instrument.
9.10 Relationship of Parties. The parties are independent contractors.
Nothing in this Agreement shall constitute either party the agent of the other
party for any purpose or in any sense whatsoever, or constitute the parties as
partners or joint venturers.
9.11 Modification. This Agreement may be modified or amended only by a
written agreement signed by each party.
9.12 Waiver. The failure of either party to enforce at any time the
provisions of this Agreement, or the failure to require at any time performance
by the other party of any of provisions of this Agreement, shall in no way be
constituted to be a present or future waiver of such provisions, nor in any way
affect the validity of either party to enforce each and every provision
thereafter. The express waiver by either party of any provision, condition or
11
<PAGE> 21
requirement of this Agreement shall not constitute a waiver of any future
obligation to comply with such provision, condition or requirement.
9.13 Entire Agreement. The terms and conditions herein constitute the
entire agreement between the parties and supersede all previous agreements and
understandings, whether oral or written, between the parties hereto with
respect to the subject matter hereof and no agreement or understanding varying
or extending the same shall be binding upon either party unless in a written
document signed by the party to be bound.
9.14 Section Headings and Language. The section headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
9.15 Construction. Each party acknowledges and agrees that this
Agreement has been the result of arms' length negotiation by the parties and
their respective counsel, with each party participating in the preparation
hereof. As a consequence, there shall be no presumption that the provisions
hereof are to be construed for or against either party on the basis of the
relative participation of the parties in the drafting of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered effective as of the date first written above.
Censtor Corp. Western Digital Corporation
By: /s/ Russell M. Krapf By: /s/ Timothy Leyden
----------------------------- -----------------------------
Name: Russell M. Krapf Name: Timothy Leyden
--------------------------- ---------------------------
Title: President CEO Title: Vice President, Finance
Personal Storage Group
-------------------------- ---------------------------
12
<PAGE> 22
requirement of this Agreement shall not constitute a waiver of any future
obligation to comply with such provision, condition or requirement.
9.13 Entire Agreement. The terms and conditions herein constitute the
entire agreement between the parties and supersede all previous agreements and
understandings, whether oral or written, between the parties hereto with
respect to the subject matter hereof and no agreement or understanding varying
or extending the same shall be binding upon either party unless in a written
document signed by the party to be bound.
9.14 Section Headings and Language. The section headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
9.15 Construction. Each party acknowledges and agrees that this
Agreement has been the result of arms' length negotiation by the parties and
their respective counsel, with each party participating in the preparation
hereof. As a consequence, there shall be no presumption that the provisions
hereof are to be construed for or against either party on the basis of the
relative participation of the parties in the drafting of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered effective as of the date first written above.
Censtor Corp. Western Digital Corporation
By: By: /s/ Timothy Leyden
----------------------------- -----------------------------
Name: Name: Timothy Leyden
--------------------------- ---------------------------
Title: Title: Vice President, Finance
-------------------------- ---------------------------
Personal Storage Group
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 294,448
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,236,524
<PP&E> 45,703
<DEPRECIATION> 33,880
<TOTAL-ASSETS> 1,481,767
<CURRENT-LIABILITIES> 9,643,267
<BONDS> 0
0
32,509,031
<COMMON> 50,508,593
<OTHER-SE> (105,667,435)
<TOTAL-LIABILITY-AND-EQUITY> 1,481,767
<SALES> 0
<TOTAL-REVENUES> 3,202,704
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,654,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,183,680
<INCOME-PRETAX> (8,289,637)
<INCOME-TAX> 319,450
<INCOME-CONTINUING> (8,609,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,609,087)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> (0.93)
</TABLE>
